Manufacturer's product choice in the presence of environment-conscious consumers: brown product or green product

Abstract

Nowadays, the brown products are losing market coverage to their green alternatives due to consumers' increasing environmental awareness. Confronted with this threat, many traditional manufacturers currently producing only brown product are contemplating the launch of green product. Base on this background, this paper explores the optimal product choice for the manufacturer. We first derive the optimal results for each product choice. Then we analyse the optimal product choice for the manufacturer. Next, we study how to induce the production of green product. Finally, the fraudulent behaviour on product's environmental attributes is addressed. Main findings are as follows. First, manufacturer's optimal product choice is to produce green product if the investment-to-value ratio and the unit production cost for green product are low and to produce brown product if the investment-to-value ratio and the unit production cost for green product are high. Second, the two-part tariff contract is applicable to stimulate the manufacturer to produce green product under certain conditions. While exterior intervention is necessary under other conditions. Third, when the manufacturer and the retailer diverge in product preference, the manufacturer has a strong incentive to behave fraudulently, and this type of manufacturer needs strict supervision.