Key Factors for Green Product Line Extensions

We consider the price and quality optimization (i.e., product line design) problem of a monopolist selling (at most) two product variants, a base product and a green variant that comprises recycled/reused content, to a market of two distinct consumer types with heterogeneous valuations for the base product. Our setting features three distinguishing elements, which had hitherto not been considered together in the literature: (i) Consumer segments demonstrate opposing perceptions of the green variant, i.e., “conventionals” associate dis-utility with a green variant that has more recycled/reused content, whereas “naturalites” have a higher willingness-to-pay for the same. (ii) Including a green variant yields diseconomies-in-scope for the firm’s production costs, which increases non-linearly as product variants become more vertically (and environmentally) differentiated. (iii) Using more recycled/reused content for the green variant permits input material cost savings. Using an endogenous demand model and non-linear programming theory, we characterize the economic conditions under which a monopolist can profitably cover the entire market by maintaining a uniformly green product line, i.e., by selling only the green product variant. When such equilibrium outcomes result, the firm’s traditional profit maximization objective coincides with an environmentally-conscious outcome. We also assess the demand segmentation and firm profit consequences of underestimating the naturalites’ (conventionals’) marginal utility (dis-utility) for a green variant with more recycled/reused content, and show that such missteps may yield adverse implications for both firm profits and the environment.