Green product development and environmental performance: Investigating the role of government regulations

We study a problem where a firm must decide on its product types, market price(s), and quality dimensions. Given that consumers' willingness to pay for an environmental quality dimension (e.g., energy efficiency) varies, the firm makes the above-mentioned decisions to improve its performance. Since the outcomes of such decisions directly influence the firm's environmental performance, our primary goal is to understand how governmental regulations can be set as a driver of green product development and ultimately benefit the environment. Our investigation captures quality-based development costs while incorporating the environmental quality dimension. The findings reveal that the government should impose regulations with caution as firms may opt for a strategy that provides a larger profit at the expense of lower total environmental performance. Moreover, under some conditions, strict regulations can cause firms to be reluctant to innovate by producing a single standard product rather than distinct products for different market segments.