Environmental policies with green network effect and price discrimination

Abstract

We consider a duopolistic market in which a green firm competes with a brown rival, and both firms offer vertically differentiated products. Consumers are heterogeneous both in their willingness to pay for hedonic quality and in their environmental concern. The latter is positively related to the green firm’s market share, giving rise to a green network effect. We characterize how price and quality schedules are set and how consumers sort between the two firms at the market equilibrium. When considering pollution from both consumption and production, we compute total welfare and evaluate the impact of different environmental policies. Our analysis demonstrates that efficiency can be achieved through a uniform emission tax, which restores the optimal differential between firms’ intrinsic qualities. Notably, we find that a discriminatory subsidy, which decreases with the willingness to pay for intrinsic quality, re-establishes the optimal sorting of consumers.