Optimal production for manufacturers considering consumer environmental awareness and green subsidies

Abstract

Manufacturers provide products that have distinct green levels (i.e. higher degree of environmental friendliness) to satisfy consumer demands with different green preferences. A product with a higher green level generate fewer emissions but have higher costs. To encourage those manufacturers to produce environmentally friendly products, a government can implement subsidy policies. This paper focuses on the decision-making problem faced by manufacturers to determine which levels of green products to produce and production quantities at each green level. We develop an optimization model under oligopolistic competition considering green preferences and subsidies, with the objective of profit maximization for the manufacturers. We prove the existence and uniqueness of equilibrium and propose a converged algorithm with theory of finite dimensional variational inequality. Numerical results show that an increase of consumer environmental awareness will incentivize manufacturers to produce more green products with higher green levels, but this does not necessarily lead to higher profits for the manufacturers. Moreover, a well-designed subsidy policy can not only generate more profits for manufacturers, but also save subsidy investment for the government. In addition, with the changes of consumer environmental awareness or/and subsidy policy, manufacturers may obtain more profits even if the competition is more fierce.