A Model for Recycling Target Policy under Imperfect Competition With and Without Cooperation Between Firms

The purpose of this paper is to develop a general theoretical model that describes production and recycling in an n-firm oligopoly market in which firms can cooperate for recycling. We use a three-stage game to analyze a specific recycling issue. In stage 0, the government sets a target recycling rate as well as virgin material and final disposal tax rates. In stage 1, n identical firms simultaneously invest to reduce the cost of recycling given the recycling target. Here we treat this activity as a type of R&D. Furthermore, we consider three kinds of R&D activities depending on what firms maximize in stage 1, namely, industry-wide cooperation, within-group cooperation, and non-cooperation. In stage 2, firms engage in a Cournot competition. Surprisingly, positive virgin material taxes or positive final disposal taxes discourage firms from engaging in recycling R&D efforts in normal situations, regardless of whether R&D cooperation takes place. We compare second-best social welfare levels under the three regimes described above. We find that both non-cooperation and within-group cooperation are inferior from a welfare perspective to industry-wide cooperation. Furthermore, in the case of within-group cooperation, the symmetric division of firms induces the lowest welfare for all ranges of a given spillover parameter.