Pricing for environmental compliance in the auto industry

For environmental and political reasons, governments have imposed fleetwide standards for emissions and fuel economy on automotive manufacturers. For example, the US government has imposed corporate average fuel economy (CAFE) regulations on manufacturers for their vehicles sold in the United States. When these standards run contrary to consumer preferences or when technology advances fail to deliver anticipated benefits, manufacturers may use price as a short-term strategy to encourage consumers to switch to vehicles that help the firm to achieve fleetwide compliance. We developed a mathematical model to coordinate price with production decisions while meeting fleetwide standards, market share, and production-capacity constraints. To incorporate substitutability of products, we created a demand model that uses consumers' second-choice preferences and linear demand curves.