Market Inertia and the Introduction of Green Products: Can Strategic Effects Justify the Porter Hypothesis?

Abstract

If, according to Porter’s hypothesis, a “greener” strategy is more profitable, why may its implementation need regulatory intervention? We present a repeated Cournot duopoly where the market may exhibit inertia towards the adoption of even cost-efficient environmental goods. With consumers recognizing that a product is green only with a time lag, if a firm unilaterally adopts the green product initially loses profit due to (a) increased costs (direct effect) and (b) reduced market share (strategic effect). By imposing simultaneous adoption, regulation eliminates (b), thus enhancing long-run profitability. Through a similar mechanism a government can increase its domestic firms’ international market share and profits by forcing them to simultaneously adopt the green product.