Modeling competitive firms' performance under price-sensitive demand and cap-and-trade emissions constraints

Nikoo Sabzevar, S.T. Enns, Joule Bergerson and Janne Kettunen

International Journal of Production Economics, 2017, vol. 184, issue C, 193-209

Abstract: This study analytically examines the effects on profitability of using an emissions cap-and-trade policy. A game-theoretic Cournot model with two competitive firms producing goods, along with undesirable emissions, for a single market is investigated. Production costs are non-linear and product demand is price-sensitive. First, relationships are derived to maximize each firm's profit under a given emissions permit price and given emissions constraints, or caps. Production volumes for each firm at the equilibrium are determined with and without the assumption that emissions permit trading can occur. Relationships are then developed to investigate behavior as a function of emissions caps, the allocation of caps between firms, and the emissions permit price. Bounds on the ranges within which permit trading will occur are also determined. Results show the conditions under which profits rise or fall as emissions constraints are tightened. The conditions under which firms benefit equally from emissions permit trading are also developed. Finally, the analysis shows that the firm with the lower emissions intensity will never purchase emissions permits if its operational costs are higher than those of the competitor. Therefore, cap-and-trade will not necessarily provide an incentive for the firm with the lowest emissions intensity to increase its market share.

Keywords: Cap-and-trade; Emissions regulation; Game theory; Cournot model; Optimization; Price-sensitive demand (search for similar items in EconPapers)
Date: 2017
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (14)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S092552731630322X
Full text for ScienceDirect subscribers only

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:proeco:v:184:y:2017:i:c:p:193-209

DOI: 10.1016/j.ijpe.2016.10.024

Access Statistics for this article

International Journal of Production Economics is currently edited by Stefan Minner

More articles in International Journal of Production Economics from Elsevier
Bibliographic data for series maintained by Catherine Liu ().