Competitive strategies for original equipment manufacturers considering carbon cap and trade

Abstract

This paper considers an original equipment manufacturer (OEM) faces competition from an independent remanufacturer (IR) and they both are regulated by carbon cap and trade policy (CTP). We develop models to explore the OEM’s optimal competitive strategy in the face of IR’s competition and environmental regulation. We first investigate the impact of CTP on the OEM and IR. Then, we analyze three competitive strategies that the OEM may choose: remanufacturing, fixed-fee licensing, and royalty licensing. We investigate their optimal decisions under each strategy and identify the conditions under which these strategies can coordinate the OEM and IR. Finally, we explore conditions under which one strategy is superior to another. The results show that the OEM is worse off when competing with the IR under CTP if the carbon cap allocated to the OEM is small. Fixed-fee licensing and royalty licensing can coordinate the OEM and IR not only from an economic perspective but also from an environmental perspective. The OEM’s optimal competitive strategy is determined by thresholds of three critical parameters: the fixed cost of setting up a remanufacturing system, the fixed-fee, and the per-unit royalty. We provide specific guidance on strategy selection for the OEM.