The optimal subsidy strategy based on green product design model

Abstract

Green product development, which improves environmental quality through product design, is receiving more and more attention from government, consumers and industries around the world with the decreasing of the environmental quality. In this paper we employ a quality-based model to analyze the product design strategic and government subsidy policy issues. We classify the consumers into two groups-ordinary consumers and green consumers, and consumers in different group have different valuations to traditional and green attributes (/quality) of the product. Assume that the traditional and environmental qualities can increase simultaneously. Three market strategies-ordinary market, segmentation market and green market -are discussed to maximize manufacturer's profit and total environmental quality when the government don't provide subsidy, and segmentation market and green market are analyzed with the subsidy policy. We obtain the optimal product qualities, profits and total environmental quality formulations in both basic and subsidy models, respectively. Without government subsidy, we find that the segmentation market is the optimal strategy, that is, the manufacturer produces the ordinary and green product simultaneously. When the subsidy presents, we give the optimal government subsidy interval when the manufacturer chooses the segmentation market and green market strategy, respectively. And we show that both the profit and total environmental quality are improved through the subsidy policy, but the higher subsidy rate might not necessarily benefit the environment. The optimal interval of the subsidy rate can be used to regulate and guide the development of the green product by government.