Dynamic Greentech/product innovation and pricing regulation in a monopoly exhibiting network externality

This paper aims to investigate the control optimisation issues concerning Greentech and product innovation within a monopolistic framework, particularly for goods exhibiting network effects. The unique characteristics of our study include: (i) differentiating between the efforts directed at Greentech innovation, specifically in (a) replacement technology innovation, which entails a radical transformation in the nature of emissions-producing products, and (b) abatement technology innovation, which mitigates pollution levels without altering the fundamental aspects of the technology integrated into the final product, and (ii) analysing a specific scenario in which the scale of the network is directly correlated with consumer demand. Our primary findings reveal that: (i) under certain conditions, there exists the unique saddle-point equilibrium of the system under both monopolistic and socially optimal decision-making; (ii) the impact of efforts in Greentech and product innovation on price and output depends on the level of product quality and emissions; (iii) equilibrium innovation efforts rise with stronger network effects and larger market size, but decrease as environmental tax rates rise, and (iv) to encourage the monopolist’s engagement in Greentech development, the social planner must set the environmental tax rate above the marginal damage caused by end-of-pipe emission.