Designing Product Lines with Higher Aggregate Environmental Quality

Abstract

Firms that consider designing environmentally sustainable products face technical and market constraints that are not always easy to negotiate. Our goal in this paper is to identify approaches and policies that promote sustainable innovation, under which the design decisions of a firm both maximize its profit and improve the environmental quality of its product line. We model and analyze the problem, and identify three approaches that contribute to sustainable innovation by a firm faced with a heterogeneous market of customers. Our results show that firms are able to achieve the dual goals of profits and environmental quality when (a) the firm's investments in inter-temporal R&D are considered, (b) the environmental policies are more nuanced, and (c) products are designed to cater to the psycho-social needs of their customers.