Sustainable Consumption: A Strategic Analysis

Abstract

Consumers' growing concern for the environment has motivated firms to offer sustainable products in several categories. An exploratory survey shows that many consumers desire sustainable products and are willing to pay more for them, but some consumers dislike sustainable products and want to pay less for them. Using a theoretical model where firms are horizontally differentiated and two groups of consumers have divergent preference for sustainable products, we investigate the strategic implications of sustainable consumption. First, our analysis shows that when consumers' dislike for sustainable products is moderate, the price could increase as the dislike increases. Moreover, price could decrease if consumers' desire for sustainable products increases. Second, we find that competing firms' profits can decrease with consumers' desire for sustainability but increase with consumers' dislike for sustainability. Third, we clarify when and why enforcing minimal sustainability standards for products can backfire and reduce consumer surplus. Finally, we extend the model to capture additional facets of sustainable consumption, such as multi-product firms, sustainable luxury goods and political orientation of consumers, and tease out its counterintuitive implications for the firms supplying sustainable products. 

Keywords: sustainable consumption, game theory, price competition, sustainability standard, multi-product firms, sustainable luxury goods