Cobb-Douglas preferences and pollution in a bilateral oligopoly market

In this note, we introduce pollution and examine its effects in a finite bilateral oligopoly model where agents have asymmetric Cobb-Douglas preferences. We define two strategic equilibria: the Stackelberg-Cournot equilibrium with pollution (SCEP) and the Cournot equilibrium with pollution (CEP). While the supplied quantities of the polluting and the non-polluting good depend on the preferences of all economic agents in the case of symmetric preferences, we show that when preferences are asymmetric, i) at both equilibria, each polluter’s equilibrium supply depends only on the non-polluters’ preferences for the non-polluting good; ii) at the CEP and the SCEP, the elasticity of the polluters emissions is greater when nonpolluters preferences for the non-polluting good increase, compared to an increase in their own preferences for this good; iii) firm’s emissions’elasticity decreases with the market power if their marginal cost is lower than their competitor.