Pricing and investment in manufacturing and logistics when environmental reputation matters

Abstract

We consider pricing and manufacturing and logistics investment decisions by a manufacturer facing environmentally concerned consumers. Demand depends on the price and manufacturer’s environmental performance comparatively to the industry. As environmental reputation can only be built over time and emissions reduction capacity requires sustainable investments in manufacturing and logistics processes over time, our model is dynamic. The planning horizon is divided into two stages, with the endogenously determined switching time between the two happening when a predefined capacity threshold is reached. We characterize the optimal decisions in both stages and provide a series of numerical illustrations varying the model’s parameter values.Our main findings are as follows: (i) the price decreases when switching from the first to the second stage; (ii) emissions are above the industry standard during the first stage, while they are considerably below it in the second stage; (iii) the higher the capacity threshold for emissions reduction technologies, the larger the time it takes to reach it, which is costly in terms of reputation; (iv) although the consumers judge the manufacturer’s environmental performance in relative terms with respect to the industry standard, we get that an increase in this standard has a small effect on the switching date. Finally, (v) emissions reduction capacity only has a short-term effect on the manufacturer’s overall profit.