Life-Cycle Approach to Environmental Innovation: Cost Structure, Advertising, and Competition

Using life-cycle assessment-based methods, products can be differentiated by the environmental performance/impact during their manufacturing and use life-cycle stages. Some products are reported to have higher environmental impact during the use stage, whereas for others, the environmental impact turns out to be higher during the manufacturing stage. In this article, we focus on those products in the former category, and consider a duopoly setting where profit-maximizing firms decide on their use-stage environmental innovation efforts, advertising efforts to disclose information on the manufacturing-stage environmental performance of their products, and production quantities. Use-stage environmental innovation not only improves the environmental performance of the product in use, but also increases the value of the product to end-consumers (e.g., through cost-of-use reduction). We examine two distinct cases where such innovation can be achieved through either an up-front capital investment or an increase in variable cost of production. Manufacturing-stage environmental performance of a product is typically not visible to end-consumers but could be communicated through advertising efforts. Two well-recognized advertising strategies-namely, combative advertising and constructive advertising-are analyzed as alternative information disclosure strategies. We show that when only symmetric strategies are followed by competing firms (i.e., when each firm matches its competitor's advertising approach), firms should always employ constructive advertising strategy to disclose information on the manufacturing-stage environmental performance of their products, and this result holds regardless of the environmental innovation cost structure. When asymmetric strategies are also an option, for marginal cost-intensive innovations, the equilibrium can be characterized by asymmetric advertising strategy choices of symmetric firms, whereas for development cost-intensive innovations, it is always characterized by symmetric advertising strategy choices. In this context, we advance understanding on when use-stage environmental innovation and manufacturing-stage environmental performance disclosure decisions can be the most effective economically to competing firms and examine their corresponding environmental consequences.