Competition under industry-stock-driven prevailing market price: Environmental consequences and the effect of uncertainty

Abstract

We address competition between several firms that cause pollution when producing fully substitutable products. These firms comprise the industry and each individual firm charges for its products the market price determined by the difference between cumulative market supply and demand, i.e., by the industry's stock. We find that although the greater the number of firms competing for the same primary market, the lower the market price and the higher the industry inventory surplus, the reduction in price at market equilibrium is insufficient to stimulate greater aggregate sales. That is, greater competition does not necessarily induce higher industry output and pollution. Furthermore, we show that commitment production/pollution strategies compared to contingent strategies do not necessarily result in lower pollution, especially when the number of competing firms is not high, market uncertainty is low and proportional pollution taxation is high.