Optimisation of carbon emission reduction in a competitive market with varying saturation and eco-conscious consumers

Non-saturated markets such as high-tech markets are attracting more and more eco-conscious consumers. Their utility can be increased by firms’ investment in carbon reduction, so the overall demand can be expanded without intensifying the market competition too much. In this paper, we build a two-stage-N-firm optimisation model by assuming firms’ products are horizontally differentiated and may engage in multi-dimensional competition. We analyze three scenarios: (1) Benchmark of price-only competition, (2) Two-dimensional ‘price + investment effort’ competition, and (3) N-firm circular differentiated competition. We find that consumers’ high eco-awareness may lead firms to lower investment levels for carbon emission reduction. When the market is sufficiently saturated, we reveal that a Prisoner’s Dilemma will occur where firms are trapped in investment-effort competition, so their profits are damaged. We further investigate the environmental performance and the social welfare, finding that consumers’ high eco-awareness may render the environment worse and undermine the social welfare.