Manufacturers’ Competition and Cooperation in Sustainability: Stable Recycling Alliances

Rather than organizing disposal of consumer-generated waste themselves, many states and countries have passed legislation that makes producers responsible for the proper disposal (i.e., recycling) of the products that they bring to the market. We study the stability of producers’ strategies emerging under such legislation. In our paper, the producers compete with multiple differentiated products in consumer markets but may consider cooperating when recycling those products to benefit from economies of scale. Products made by different producers or sold in different markets might still be considered for joint recycling. Our main questions are when and whether firm-based recycling strategies (i.e., separately recycling products falling under same brand) or market-based recycling strategies (i.e., separately recycling products falling in the same product category) emerge as stable outcomes. To that end, we analyze a series of simple producer-market configurations. We first look at an asymmetric market model with two producers making three products in two markets, and then, we look at a symmetric market model with two producers competing with four products in two markets. Our results show that, with intense market competition and differentiated market sizes, producers may recycle their products on their own without cooperating with others. In some instances, they can add a product from their competitor to their recycling mix. Because these outcomes are never socially optimal, they may reduce social welfare and require government intervention. Otherwise, with less intense competition or more equitable market shares, all-inclusive (market-based) recycling is the most common stable outcome with high (low) scale economies, and the firms’ independent choices might lead to social optima.