Towards sustainable consumption and production: Competitive pricing of modular products for green consumers

Abstract

Concern for unsustainable development has peaked, and promoting and devising sustainable production and consumption is vital. Therefore, via an analytical model, we examine the impact of modularity and consumer sensitivity to sustainability on the pricing decisions of two competing firms. Consider an environmentally conscious (green) consumer who will buy one of two available, horizontally differentiated products: a modular product (M) manufactured by Firm M or a standard product (S) manufactured by Firm S. Firm M can take advantage of its modular production technology and product return policy. For such a consumer-driven demand setting, we develop a model and solve to optimality a single-stage, non-cooperative game where both firms simultaneously set their competitive prices. In addition to analytical expressions for the optimal prices and the profits for both firms, we provide structural results and numerical examples to render practical insights: The refund rate has a strong impact on profits; sensitivity of product greenness can be increased by conscientious advertising, and the reusability of modular parts encourages lower pricing and higher market share. We assert that modularity is a strong concept and practice in developing sustainable products and thereby in production, which, in turn, may enhance sustainable consumption. This study's findings have direct implications for reverse supply chain management, and firms should take these findings into account early in the product design phase.