Picture of virus under microscope

Research under the microscope...

The Strathprints institutional repository is a digital archive of University of Strathclyde research outputs.

Strathprints serves world leading Open Access research by the University of Strathclyde, including research by the Strathclyde Institute of Pharmacy and Biomedical Sciences (SIPBS), where research centres such as the Industrial Biotechnology Innovation Centre (IBioIC), the Cancer Research UK Formulation Unit, SeaBioTech and the Centre for Biophotonics are based.

Explore SIPBS research

Optimal allocation of tradable emission permits under upstream-downstream strategic interaction

De Feo, Giuseppe and Resende, Joana and Sanin, Maria Eugenia (2012) Optimal allocation of tradable emission permits under upstream-downstream strategic interaction. International Game Theory Review, 14 (4). ISSN 0219-1989

[img]
Preview
PDF
120530ManuscriptIGTR.pdf - Accepted Author Manuscript

Download (228kB) | Preview

Abstract

In this paper we analyze environmental regulation based on tradable emission permits in the presence of strategic interaction in an output market with differentiated products. We characterize firms' equilibrium behavior in the permits and in the output market and we show that both firms adopt "rival's cost-rising strategies". Then, we study the problem of the regulator that aims to maximize social welfare, proposing an efficient criterion to allocate permits between firms. We find that the optimal allocation criterion requires a perfect balance between the difference on firms' price-cost margins in the permits and the difference on firms' markups in the output market. In light of the previous result, we use a simulation to obtain the optimal allocation of permits between firms as a function of output market characteristics, in particular as a function of goods substitutability.