A mathematical optimization model for sustainable product line design and pricing under regulatory incentives

Abstract

As sustainability concerns increasingly influence product line decisions and regulatory incentives, firms must adopt optimization strategies that accommodate diverse consumer segments with varying levels of environmental awareness and willingness-to-pay while designing cost-effective yet sustainable product offerings that may benefit from sustainability incentives. To address these challenges, this study develops a mathematical optimization model that captures the strategic interactions between firms, consumers, and regulatory agencies by integrating market heterogeneity, environmental awareness, and regulatory incentives. We begin by constructing and experimentally validating a utility-based consumer choice model that reflects differences in environmental awareness and willingness-to-pay. This consumer behavior framework is then integrated with regulatory incentives to address the challenges of product line design and pricing for firms offering both conventional and environmentally friendly products. Our model builds on previous research on optimal product line expansion by analyzing the interplay between consumer preferences, use-phase efficiency, and regulatory incentives. Through computational analyses, we demonstrate how factors such as market segmentation, manufacturing costs, and incentives shape optimal product design, pricing strategies, and environmental impact. The findings provide actionable insights for policymakers, helping them design regulatory incentives that effectively encourage firms to balance profitability with environmental responsibility.