Pricing and quality decisions and financial incentives for sustainable product design with recycled material content under price leadership

Design for recycling has been promoted by companies and governments around the world as one of the most important practices for achieving sustainability. The success or failure of such a practice, however, depends heavily on the financial incentives for firms to design products with more recycled or recyclable material contents. An interesting phenomenon that can be observed in many markets with products made predominately from either virgin or recycled materials is the existence of price leadership. In this paper, we utilize an interdisciplinary approach with both theoretical and empirical analyses to study the pricing and design decisions for products with virgin and recycled material contents in a duopoly market consisting of both the environmentally conscious (green) and non-environmentally conscious (brown) consumers under price leadership. Our analytical results show that the brown segment's efficient quality provides an “anchor product position” for the price leader regardless of whether the price leader is a brown or green firm. The price follower's financial incentive for becoming a green or brown firm will then lead to different cases of price leadership with very different environmental consequences. Specifically, the arrangement where the brown and green firms are the price leader and follower, respectively, leads to more environmentally friendly design decisions than those under the other arrangement where the duopolists switch their pricing roles. In addition, we conduct an empirical analysis to explore the specific types of price leadership in the markets of aluminum, cardboards, and PET. Based on the equilibrium pricing and quality decisions, we analyze the financial incentives for the more environmentally friendly case of price leadership to be realized, and derive important insights to formulating strategies and policies to implement the practice of design for recycling from the interdisciplinary perspective. & 2013 Elsevier B.V. All rights reserved.