Dynamic pricing and green investments under conscious, emotional, and rational consumers

Abstract

We consider behavioral issues in a new dynamic model in which a manufacturer (M) makes pricing and green investment decisions while facing heterogeneous customers including emotional, conscious, and rational consumers. Emotional consumers base their purchasing decisions on M’s green investments. Their emotions are stochastic, dynamic, and accumulate over time. The investment is made over time and is subject to time-to-build so that there is a time-lag between investment and production. Differently, conscious consumers respond to both green investments and prices and have no memory on the M’s past green initiatives. The rational consumers are not sensitive to environmental issues and base their decisions only on product price. Our findings suggest that M should realize that emotional consumers have the largest impact on investments, prices, and profits. Therefore, firms should first think to satisfy the emotional consumers and then all other segments. When firms have environmental targets or restrictions, all segments must be satisfied independent of their impact on the profits. This finding contributes to the literature by highlighting that the trade-off between economic and environmental performance also exists in presence of consumer segments.

Keywords

• Green product investment
• Consumer heterogeneity
• Uncertainty
• Skimming strategy
• Penetration strategy