How much is enough? Government subsidies in supporting green product development

This paper tackles the problem of a monopolist firm that is considering designing products with environmental qualities while facing significant research and development costs. A mathematical formulation is adopted to model the impact of government subsidy on the firm's choice between mass marketing, where only one standard product serves the entire market, and market segmentation, in which the firm develops ordinary and green products for two market segments. The firm's behavior in reaction to the subsidies is analyzed through a two-stage Stackelberg game. The obtained results reveal that the subsidy level does not affect the relationships between the environmental qualities of the manufactured products under different marketing strategies when the green market is not strong. Our analyses also demonstrate how an optimal subsidy level should be selected to maximize the social welfare, and how this optimal subsidy is impacted by various parameters such as the magnitude of the development cost.