The global transition to sustainability places firms at a strategic crossroads, compelling them to balance profitability with Environmental, Social, and Governance (ESG) performance. This study confronts a critical challenge within this transition: the risk of internal cannibalization, where a firm's new green products erode the market for its conventional offerings. We introduce a novel two-phase, game-theoretic framework to analyze the dynamic interactions between duopolistic firms-an incumbent and a challenger-and a government regulator. Our analysis reveals that cannibalization is not an inevitable market force but an endogenous strategic variable that can be managed. We demonstrate that while calibrated policy support is crucial for catalyzing eco-innovation, overly aggressive interventions can paradoxically trigger a "crowding-out" effect, stifling private R&D incentives. The results show that the optimal path to aligning profitability with sustainability lies in a strategic dual-channel portfolio, where adaptive pricing transforms cannibalization from a systemic risk into a market capture mechanism. This research offers quantifiable policy thresholds to guide regulators and provides actionable strategies for corporate leaders to secure a competitive advantage in the green economy.