Competitive pricing and innovation investment strategies of green products considering firms' farsightedness and myopia

Abstract

AbstractWith the deterioration of ecological environment and the improvement of consumer environmental awareness, a number of firms are actively engaging in product innovation to enhance product greenness. In this paper, we develop a differential game involving two competing firms, each of which produces and sells one green product to end consumers. The two firms carry out innovation investments to improve customers' perceived product greenness and also determine their own retail prices. Each firm's demand is linearly dependent on its own retail price and innovation investment, the rival's retail price and innovation investment, and the customer perceived product greenness. The objective of our study is to examine the impacts of the competing firms' farsighted and myopic behaviors regarding the consumer perceived product greenness on their pricing and innovation investment strategies and profits. We find the following interesting results. First, when one firm is farsighted and the other is myopic, the latter obtains more profits than the former if one firm's innovation investment has a relatively small direct effect on the other's demand, that is, there is a free‐riding for the myopic firm. Second, when the intensity of competition regarding the two firms' innovation investments is not strong, competing with a farsighted rival can make a firm better off. Third, the scenario that the two firms adopt farsighted strategies can achieve an equilibrium, whereas acting myopic strategies can bring more profits for both of them under some conditions, which leads to a prisoner's dilemma. These results still hold under separable multiplicative demand between retail prices and innovation investments.