Vertical differentiation in a Cournot industry: The Porter hypothesis and beyond

We modify the vertically differentiated duopoly model by André et al. (2009) replacing Bertrand with Cournot behaviour, and we characterise the region wherein a Porter-type result takes place. We show that the Porter hypothesis applies in an equilibrium taking always the form of a prisoner's dilemma. Moreover, whenever the asymmetry in the cost parameters between green and brown technology is not too high, a class of equilibria emerges wherein firms converge spontaneously onto the green standard as a result of dominant strategies, any environmental regulation being altogether absent.

► We model the choice between green vs brown standards under Cournot competition with convex variable costs of production and fixed adoption costs. ► We span the cost space to characterise analytically firms’ equilibrium behavior. ► Our analysis proves that the Porter hypothesis applies in a parameter region where the unregulated game is a prisoner's dilemma. ► We also prove the existence of an admissible region of cost parameters giving rise to a green equilibrium in absence of regulation.