Environmental policy, firm location, and product differentiation : the role of "green" preferences and inter-firm pollution

Endogenous firm location is analyzed in a discrete two-region-two-firm model of product differentiation. In a non-cooperative game, two regional governments first decide on the imposition (or lifting) of domestic production standards; firms then choose technology (clean or polluting), location and price. Equilibrium quality and location structure are determined analytically. The existence of consumers willing to pay a premium on clean production methods, and the possibility of inter-firm pollution alleviate the tendency of firms to delocate into the region with the weaker regulation; then, a deregulatory race to the bottom is less likely.