The Optimal Green Product Design with Cost Constraint and Sustainable Policies for the Manufacturer

In this paper, we study how the manufacturer balances the investment between the green product and the ordinary product as consumer environmental awareness (CEA) increases. The green product and ordinary product have a basic commonality traditional quality but difference between the premium environmental quality and premium traditional quality. With the cost constraint, we present manufacturer’s optimal strategy: producing one product or two products and the optimal traditional quality of the ordinary product or the optimal environmental quality of the green product. Then, we further study the effect of government subsidy and tax on manufacturer’s strategies and analyze the effectiveness of the policies. Finally, we give some numerical examples and sensitivity analysis. The main findings are as follows: (1) manufacturer’s cost constraint affects product’s optimal quality but may not influence manufacturer’s optimal product strategy: the manufacturer may not produce two products even through the budget is sufficient large; (2) the government policy could induce the manufacturer to invest green product but may be inefficient; the subsidy and tax policies are mutual exclusion; and either subsidy or tax could play a role in changing manufacturer’s strategy. Some management insights are given.