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Retailing and long-term environmental concerns: The impact of inventory and pricing competition

Abstract Retailers are sources of environmental pollution, 80–90% of which is ultimately due to the processes that retailers set in motion by their orders for the products they carry and sell. The goal of this paper is to investigate environmental consequences of an intertemporal competition between retailers facing demand and price-related uncertainties. In such an environment, mass displays of inventories by a firm stimulate sales while inventory shortages discourage consumers and stimulate the sales of the firm’s competitors. We consider two types of retailers – price setters and price takers – both engaged in an associated inventory competition by selling products that are partially substitutable. While price-taking retailers let the market decide the prices, price-setting retailers compete also on prices. We find that competition by both types of firms does not necessarily increase the expected retail output and, consequently, the ensuing pollution. In particular, though the stocks of the price-taking retailers grow as the competition between them intensifies, their long-term expected output declines. Moreover, the impact of uncertainty implies greater precaution since both output and pollution further decline as the uncertainty grows.