Customer, regulatory, and competitive pressure as drivers of environmental innovation

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Abstract

We develop an economic analysis in order to examine the effects of consumer, regulatory, and competitive pressure on firm investments in environmentally friendly production. Specifically, we ask: Why do firms vary in their levels of environmental innovation? Under what conditions are such pressures effective in bringing about environmental innovation? We first consider a monopolist who faces the twin pressures of reduced customer demand and regulatory penalties, as a result of its emissions. In response to these pressures, the firm has the opportunity to make a costly investment in reduction of emissions. Secondly, we consider a competitive scenario in which two firms compete for environmentally sensitive customers. Solving our model, we find that pressure has the intended effect as long as the firm's initial level of emissions is below a certain threshold. If the emissions are above this threshold, we find that pressure might have an adverse effect on the firm's environmental investment, and that subsidies that support environmental innovation can be a better alternative. We also show that competition over environmentally sensitive customers can improve the effectiveness of environmental pressures.
Original languageEnglish
Pages (from-to)519-527
JournalInternational Journal of Production Economics
Volume131
Issue number2
Early online date4 Feb 2011
DOIs
Publication statusPublished - Jun 2011

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Innovation
Economic analysis
Environmental innovation

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title = "Customer, regulatory, and competitive pressure as drivers of environmental innovation",
abstract = "We develop an economic analysis in order to examine the effects of consumer, regulatory, and competitive pressure on firm investments in environmentally friendly production. Specifically, we ask: Why do firms vary in their levels of environmental innovation? Under what conditions are such pressures effective in bringing about environmental innovation? We first consider a monopolist who faces the twin pressures of reduced customer demand and regulatory penalties, as a result of its emissions. In response to these pressures, the firm has the opportunity to make a costly investment in reduction of emissions. Secondly, we consider a competitive scenario in which two firms compete for environmentally sensitive customers. Solving our model, we find that pressure has the intended effect as long as the firm's initial level of emissions is below a certain threshold. If the emissions are above this threshold, we find that pressure might have an adverse effect on the firm's environmental investment, and that subsidies that support environmental innovation can be a better alternative. We also show that competition over environmentally sensitive customers can improve the effectiveness of environmental pressures.",
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