The impact of development cost on product line design and its environmental performance

Abstract

To address environmental problems such as pollution and climate change, many firms have endeavoured to develop green products with higher environmental quality, which includes dimensions like energy efficiency and recyclability. However, environmental quality is oftentimes associated with significant development cost. In this paper, we build and analyse mathematical models to understand how development cost affects a firm’s product line design when there are two consumer segments with different willingness to pay for environmental quality. The firm can employ the mass marketing strategy and develop one standard product for all consumers, or employ the market segmentation strategy and develop two differentiated products for the two consumer segments separately. We show how various parameters, especially the development cost, affect the firm’s choice on the product line length, or equivalently, between the mass marketing and market segmentation strategies, and the consequent profit and environmental performance. Furthermore, we identify different scenarios where the objective of maximizing profit may or may not lead to better environmental performance.