Investigating the inferior manufacturer’s cooperation with a third party under the energy performance contracting mechanism

Abstract

In a duopoly market where exists technological differences, the inferior manufacturer always lies in the disadvantaged status because of the terrible energy efficiency in production. Lack of cooperation fee, and disadvantages in technology and skills are main barriers limiting the inferior manufacturer’s technological advancement. This study aims to investigate the inferior manufacturer’s cooperation with a third party under the Energy Performance Contracting (EPC) mechanism through a game theory model. The results show that: (i) Cooperation with a third party under the EPC mechanism could help the inferior manufacturer achieve technological advancement and gain more profits without bearing extra cooperation fees. (ii) When the inferior manufacturer carries out cooperation with a third party under the EPC mechanism, four major factors are critical, including the revenue sharing ratio of the third party, the service level of the third party, the market size and the energy price. (iii) In EPC cooperation, the optimal service level provided by the third party depends on the revenue sharing ratio. (iv) When the inferior manufacturer carries out EPC cooperation with a third party, the cooperation would reduce the market equilibrium price, enhance the total equilibrium quantities and in the meanwhile increase the total consumer surplus. Overall, the study contributes to exploring the feasibility of introducing the EPC cooperation to fulfill the inferior manufacturer’s technology advancement, in which the inferior manufacturer does not bear any extra fee for the cooperation. Particularly, the study contributes to investigating the manufacturer’s optimal cooperation decisions by assessing the EPC cooperation between the inferior manufacturer and the third party based on game-theoretic models.