Emission Reduction Technology Licensing and Diffusion Under Command-and-Control Regulation

Abstract

In this paper, we discuss a patented emission reduction technology that a monopolistic upstream eco-industry licenses to the polluting firms in a downstream oligopolistic industry, which is subject to command-and-control regulation. We explicitly model the interaction between the outside innovator and the polluting firms, using a non-cooperative game-theoretical framework. We find that full and partial diffusion can both occur in equilibrium, depending on the relationship between environmental regulation stringency and cleanliness improvement of the new technology. Furthermore, we study the impacts of environmental regulation stringency and the improvement in cleanliness on the adoption and the diffusion of the emission reduction technology.