Design for the environment: impact of regulatory policies on product development

Abstract

Globally automakers are facing pressure from their stakeholders to follow sustainable business practices and produce products that are less harmful to the environment. The introduction of gas guzzling automobiles in the US market despite the increasingly stringent emission norms highlights the widening gap between the goals of the regulators and the automakers, demanding a fresh outlook at the regulatory framework. In this paper, we therefore propose a composite regulatory standard that not only allows the regulators to control various environmental standards, but also provides automakers with an opportunity to exploit scale economies and synergies in product development. Our results show that under composite regulations, sufficiently high economies of scale will ensure higher traditional and environmental qualities as well as higher profits for the automaker while operating in two markets as opposed to a single market. We also find under the composite regulations that, when more demanding norms are in place, despite positive synergies between traditional and environmental quality attributes, higher environmental quality is not guaranteed unless the scale economies are sufficiently high. Our work has implications for regulatory authorities in evaluating alternative policy design under heterogeneous market characteristics and technological synergies.