Designing sustainable products under coproduction technology

Problem definition: A manufacturer takes raw material with an exogenous quality distribution to make a traditional product and a coproduct using material of quality above and below a well-established standard, respectively. The market consists of traditional consumers, who are only willing to pay for a product’s consumption value, and some environmentally conscious (i.e., green) consumers, who additionally value the product’s material conservation. In this context, we study the firm’s optimal design of its coproduct, that is, its quality and price decisions. Academic/practical relevance: Motivated by emerging conservation-oriented business practices exemplified by companies such as Taylor Guitars, our study informs resource-dependent firms whether and how to design their product line to leverage a coproduct’s environmental value. Our findings also yield important policy implications regarding the conservation of natural resources. Methodology: We formulate and solve the firm’s challenge as a constrained optimization problem, supplemented with extensive sensitivity analyses and robustness tests. Results: When the material cost is intermediate and consumers are not sufficiently green, the firm should position the coproduct without exploiting its environmental value. Otherwise, the firm should position the coproduct by extracting its environmental value from green consumers, in which case the firm may strategically abandon some traditional consumers by leaving their demand unfulfilled. Managerial implications: Quotas and taxation on material supply in general act as policy substitutes. A greener market may inadvertently result in higher resource consumption and waste. Quotas can mitigate such adverse effects.