Optimal subsidy policy for accelerating the diffusion of green products
Abstract: We consider a
dynamic duopoly market in which two firms respectively produce green products
and conventional products. The two types of product can substitute each other
in some degree. Their demand rates depend on not only prices but the consumers’
increasing environmental awareness. Too high initial cost relative to
conventional products becomes one of the major obstacles that hinder the
adoption of green products. The government employs subsidy policy to trigger
the adoption of green products. The purpose of the paper is to explore the
optimal subsidy strategy to fulfill the government’s objective.
Design/methodology/approach: We suppose the players in the game employ
open-loop strategies, which make sense since the government generally cannot
alter his policy for political and economic purposes. We take a differential
game approach and use backward induction to analyze the firms’ pricing strategy
under Cournot competition, and then focus upon a Stackelberg equilibrium to
find the optimal subsidy strategy of the government.
Findings: The results show that the more remarkable the energy or
environmental performance, or the bigger the initial cost of green products,
the higher the subsidy level should be. Due to the increasing environmental
awareness and the learning curve, the optimal subsidy level decreases over
time.
Research limitations/implications: In our model several simplifying
assumptions are made to keep the analysis more tractable. In particular, we
have assumed only one type of green product. In reality several types of
product with different energy or environmental performances exist. Our research
can be extended in future work to take into account product differentiation on
energy or environmental performance and devise a discriminatory subsidy policy
accordingly.
Originality/value: In the paper we set the objective of the government as
minimizing the total social cost induced by the energy consumption or
environmental side effect and government expenditure. In addition, we assume
the price of conventional products is variable and examine the Cournot
competition between the two firms. This study can provide more valuable
managerial insights into improving the design of subsidy policy.
Author: Hongguang Peng
Journal Code: jptindustrigg130078
