We investigate the timing of adoption of product and process innovation using a differential game where firms may invest in both activities. We consider horizontal product innovation that reduces product substitutability, and process innovation that reduces marginal cost. First, we demonstrate that the incentive for cost‐reducing investment is relatively higher than the incentive to increase product differentiation. Second, depending on initial conditions: (i) firms activate both types of investment from the very outset to the steady state; (ii) firms initially invest in only one R&D activity and then reach the steady state either carrying out only this activity or carrying out both; or (iii) firms do not invest at all in either type of innovation. Comparing R&D investments under Cournot and Bertrand behavior shows that quantity competition entails lower R&D incentives than price competition in both directions.

The Porter hypothesis and the pollution haven hypothesis seem to predict opposite reactions by firms facing environmental regulation, as the first invokes the arising of a win–win solution while the second envisages the possibility for firms to flee abroad. We illustrate the possibility of designing policies (taking the form of either emission taxation or environmental standards) able to eliminate firms’ incentives to relocate their plants abroad and create a parallel incentive for them to deliver a win–win solution by investing either in replacement technologies under emission taxation, or in abatement technologies under an environmental standard. This is worked out in a Cournot supergame in which firms may activate the highest level of collusion compatible with their intertemporal preferences.

This review summarizes the extant debate on the interplay between oligopolistic behavior and policy stimuli in determining firms’ green R&D efforts. It encompasses models based on the representative consumer and discrete choice approaches, under both Cournot and Bertrand competition. It also draws on the growing literature on environmental quality, green consumerism's ability to act as a net substitute for environmental policy and the Porter hypothesis. The review discusses empirical evidence on the main results of theoretical models. Several plausible directions for future research are also proposed.

Convex demand functions, although commonly used in consumer theory and in accordance with a large amount of empirical evidence, are known to be problematic in the analysis of firms’ behavior; therefore, they are rarely used in oligopoly theory, due to the possible lack of concavity of the firms’ profit functions and the indeterminacy arising in the limit as marginal costs tend to zero. We investigate a dynamic oligopoly model with hyperbolic demand and sticky price, characterizing the open-loop optimal control and the related steady-state equilibrium, to show that the indeterminacy associated with the limit of the static model is indeed confined to the steady state of the dynamic model, while the latter allows for a well-behaved solution at any time during the game. Although the feedback solution cannot be analytically attained since the model is not built in linear-quadratic form, we show that analogous considerations also apply to the Bellman equation of the individual firm.