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Oligopolies in pollution permit markets: A dynamic game approach

  • Chung, Sung H.
  • Weaver, Robert D.
  • Friesz, Terry L.

We reconsider the pollution permit concept in a setting extended to include dynamics, spatially diversified firms, and an oligopoly in product markets. The firms can manage their pollution emissions or stocks by (1) buying pollution permits and emitting pollution, (2) shipping pollutants to other nodes and paying such shipping costs, or (3) paying environmental costs to mitigate or recycle pollution. Firms manage these controls strategically to maximize net profits while facing non-cooperative rivals. Within this setting, we show that the non-cooperative competition among firms may be represented as a differential variational inequality (DVI) framework. Furthermore, we propose decision rules on permit purchase, establish necessary conditions, and prove the existence of solution in the formalism of the DVI. We also show that the DVI can be equivalently converted to a nonlinear complementarity problem (NCP), and show this problem, despite high dimensions, is efficiently solvable using off-the-shelf software (GAMS with the PATH solver). We illustrate this method's feasibility with a computationally intensive numerical example.

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Article provided by Elsevier in its journal International Journal of Production Economics.

Volume (Year): 140 (2012)
Issue (Month): 1 ()
Pages: 48-56

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Handle: RePEc:eee:proeco:v:140:y:2012:i:1:p:48-56
Contact details of provider: Web page: http://www.elsevier.com/locate/ijpe

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  1. Chung, Sung H. & Weaver, Robert D. & Friesz, Terry L., 2013. "Strategic response to pollution taxes in supply chain networks: Dynamic, spatial, and organizational dimensions," European Journal of Operational Research, Elsevier, vol. 231(2), pages 314-327.
  2. Chaabane, A. & Ramudhin, A. & Paquet, M., 2012. "Design of sustainable supply chains under the emission trading scheme," International Journal of Production Economics, Elsevier, vol. 135(1), pages 37-49.
  3. Dafna Eshel, 2005. "Optimal Allocation of Tradable Pollution Rights and Market Structures," Journal of Regulatory Economics, Springer, vol. 28(2), pages 205-223, 09.
  4. Kwon, Changhyun & Friesz, Terry L. & Mookherjee, Reetabrata & Yao, Tao & Feng, Baichun, 2009. "Non-cooperative competition among revenue maximizing service providers with demand learning," European Journal of Operational Research, Elsevier, vol. 197(3), pages 981-996, September.
  5. Smith, Stefani C. & Yates, Andrew J., 2003. "Optimal pollution permit endowments in markets with endogenous emissions," Journal of Environmental Economics and Management, Elsevier, vol. 46(3), pages 425-445, November.
  6. Y. Ermoliev & M. Michalevich & A. Nentjes, 2000. "Markets for Tradeable Emission and Ambient Permits: A Dynamic Approach," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 15(1), pages 39-56, January.
  7. Sundarakani, Balan & de Souza, Robert & Goh, Mark & Wagner, Stephan M. & Manikandan, Sushmera, 2010. "Modeling carbon footprints across the supply chain," International Journal of Production Economics, Elsevier, vol. 128(1), pages 43-50, November.
  8. Friesz, Terry L. & Rigdon, Matthew A. & Mookherjee, Reetabrata, 2006. "Differential variational inequalities and shipper dynamic oligopolistic network competition," Transportation Research Part B: Methodological, Elsevier, vol. 40(6), pages 480-503, July.
  9. Montgomery, W. David, 1972. "Markets in licenses and efficient pollution control programs," Journal of Economic Theory, Elsevier, vol. 5(3), pages 395-418, December.
  10. Rosendahl, Knut Einar, 2008. "Incentives and prices in an emissions trading scheme with updating," Journal of Environmental Economics and Management, Elsevier, vol. 56(1), pages 69-82, July.
  11. Vachon, Stephan & Klassen, Robert D., 2008. "Environmental management and manufacturing performance: The role of collaboration in the supply chain," International Journal of Production Economics, Elsevier, vol. 111(2), pages 299-315, February.
  12. Chen, Yuh-Wen & Wang, Chi-Hwang & Lin, Sain-Ju, 2008. "A multi-objective geographic information system for route selection of nuclear waste transport," Omega, Elsevier, vol. 36(3), pages 363-372, June.
  13. Friesz, Terry L. & Mookherjee, Reetabrata & Holguín-Veras, José & Rigdon, Matthew A., 2008. "Dynamic pricing in an urban freight environment," Transportation Research Part B: Methodological, Elsevier, vol. 42(4), pages 305-324, May.
  14. Nagurney, Anna & Dhanda, Kathy Kanwalroop & Stranlund, John K., 1997. "General multi-product, multi-pollutant market pollution permit model: a variational inequality approach," Energy Economics, Elsevier, vol. 19(1), pages 57-76, March.
  15. Friesz, Terry L. & Mookherjee, Reetabrata, 2006. "Solving the dynamic network user equilibrium problem with state-dependent time shifts," Transportation Research Part B: Methodological, Elsevier, vol. 40(3), pages 207-229, March.
  16. Friesz, Terry L. & Lee, Ilsoo & Lin, Cheng-Chang, 2011. "Competition and disruption in a dynamic urban supply chain," Transportation Research Part B: Methodological, Elsevier, vol. 45(8), pages 1212-1231, September.
  17. Stevens, Brandt & Rose, Adam, 2002. "A Dynamic Analysis of the Marketable Permits Approach to Global Warming Policy: A Comparison of Spatial and Temporal Flexibility," Journal of Environmental Economics and Management, Elsevier, vol. 44(1), pages 45-69, July.
  18. Maeda, Akira, 2003. "The Emergence of Market Power in Emission Rights Markets: The Role of Initial Permit Distribution," Journal of Regulatory Economics, Springer, vol. 24(3), pages 293-314, November.
  19. Krysiak, Frank C. & Schweitzer, Patrick, 2010. "The optimal size of a permit market," Journal of Environmental Economics and Management, Elsevier, vol. 60(2), pages 133-143, September.
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