Collaborate or Compete: Examining Manufacturers' Replacement Strategies for a Substance of Concern

The recent proliferation of media reports on substances of concern has increased consumer fears, sparked scientific debate, and highlighted the need for stronger chemical regulations. When a substance of concern is identified (e.g., bisphenol-A (BPA) in reusable water bottles), manufacturers face difficult trade-offs in deciding whether to proactively replace the substance in their products or to defer replacement and wait to see if regulation occurs. In this paper, we model a vertically differentiated market consisting of a high-end manufacturer and a low-end manufacturer, both of whom sell a product that contains a substance of concern. We examine when opportunities exist for the manufacturers to avoid competing to replace the substance, and instead, share the cost to remove it from their products. Our analysis investigates how market dynamics (competition and consumer preferences) and external factors (replacement costs and regulatory uncertainty) influence manufacturers' collaboration, replacement, and pricing decisions. We find that when the manufacturers compete to replace a substance of concern, the high-end manufacturer can use the identification of the substance to maintain, and in some cases, increase his control of the market. Collaboration is possible when either the high-end manufacturer can use collaboration to further control the market or the low-end manufacturer can use it to better position himself in the market. There are, however, potential trade-offs in consumer benefit to the manufacturers working together. For example, although collaboration reduces consumers' exposure to the substance of concern, it can decrease consumer surplus when the replacement substance is particularly costly.