LAUSR

Abstract As more consumers exhibit green preferences, manufacturers are making decisions whether to invest in green technology in order to reduce carbon emissions and attract more green consumers, who are willing to pay a premium for green products. We build a game-theoretic model in which two competing manufacturers sell substitutable products through a common retailer. The manufacturers first determine whether to invest in green technology and then set their wholesale prices; the retailer then sets the retail prices. We have three main findings. First, manufacturers’ green investment always benefits the retailer, though does not benefit the manufacturers when it is too costly. Thus, the retailer has incentives to subsidize the manufacturer(s) to encourage green technology adoption, and we derive the retailer’s optimal subsidy program. Second, adopting different technologies will ease the competition between the manufacturers and further reduce the retailer’s benefit from the upstream competition. Finally, having more manufacturers invest in green technology does not always decrease the total carbon emissions due to the market expanding effect of green technology.