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Open AccessArticle

Market Power in Output and Emissions Trading

1
Department of Economic Analysis, Universidad Complutense de Madrid, 28223 Madrid, Spain
2
ICEI, Universidad Complutense de Madrid, 28223 Madrid, Spain
*
Author to whom correspondence should be addressed.
Games 2020, 11(4), 43; https://doi.org/10.3390/g11040043
Received: 30 July 2020 / Revised: 10 September 2020 / Accepted: 16 September 2020 / Published: 12 October 2020
(This article belongs to the Special Issue Environmental Economics and Game Theory)
This article focuses on the strategic behavior of firms in the output and the emissions markets in the presence of market power. We consider the existence of a dominant firm in the permit market and different structures in the output market, including Cournot and two versions of the Stackelberg model, depending on whether the permit dominant firm is a leader or a follower in the output market. In all three models, the firm that dominates the permit market is more sensitive to its initial allocation than its competitor in terms of abatement and less sensitive in terms of output. In all three models, output is decreasing and the permit price is increasing in the permit dominant firm’s initial allocation. In the Cournot model, permit dominance is fruitless in terms of output and profit if the initial allocation is symmetric. Output leadership is more relevant than permit dominance since an output leader always tends to, ceteris paribus, produce more and make more profit whether it also dominates the permit market or not. This leadership can only be overcompensated for by distributing a larger share of permits to the output follower, and only if the total number of permits is large enough. In terms of welfare, Stackelberg is always superior to Cournot. If the initial permit allocation is symmetric, welfare is higher when the same firm dominates the output and the permit market at the same time. View Full-Text
Keywords: emissions trading; market power; duopoly; Cournot model; Stackelberg model emissions trading; market power; duopoly; Cournot model; Stackelberg model
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André, F.J.; de Castro, L.M. Market Power in Output and Emissions Trading. Games 2020, 11, 43.

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