Green quality choice in a duopoly

Abstract

This article considers a quantity-setting duopoly (Cournot rivalry) in which firms adopt an abatement technology as a device to improve the quality of products. Consumer preferences capture vertical product differentiation (quality) towards "green" products. This introduces a trade-off on the production side, as firms that do not abate, in turn, do not sustain any abatement cost but the demand for their product is low. On the contrary, firms that choose to abate incur abatement costs, but the demand for their product is high. The article aims to study and understand whether this kind of preference may lead firms to strategically invest in green technology and introduces a new, private-based (that contrasts the well-known public-based) mechanism through which pollution abatement can emerge as a sub-game perfect Nash equilibrium (SPNE) of a non-cooperative abatement decision game with product quality and complete information. The model is developed in a parsimonious way to pinpoint the main determinants of the endogenous market outcomes ranging from an anti-prisoner's dilemma in which self-interest and mutual benefit of non-abatement do not conflict to an anti-prisoner's dilemma in which self-interest and mutual benefit of abatement do not conflict, passing through to an anti-coordination scenario. Additionally, the welfare analysis reveals the existence of a win-win solution from a societal perspective. The article shows that the results obtained in the Cournot setting also hold considering a Bertrand duopoly.