Manufacture's entry and green strategies with carbon trading policy

Abstract

With the carbon emission constraints, manufacturers are under pressure to strike a balance between emissions reduction and economic benefits. To gain a comparative edge in the competitive market, manufacturers should simultaneously consider the heterogeneous demand, the impacts of competitors' strategies, and the carbon emission regulations. Therefore, based on the manufacturer's market entry and green strategies: M&A (Merger and Acquisition) and greenfield investment in green or non-green production, we employ an extended Hotelling model to differentiate consumers' willingness-to-pay and investigate the implications thereof for optimal entry, emission reduction, and pricing strategies. Furthermore, we investigate the impacts of cap-and-trade policy on manufacturers' profits and social welfare, then conduct a comparative study on the optimal decisions and profits obtained under five market entry scenarios. Our results show that the emission reduction and social welfare can be significantly promoted when the new entrant makes M&A investment in green manufacturer. Although the higher carbon trading price can increase reduction level, the profits of green manufacturers decrease in the case of greenfield investment. For the economic and environmental benefits, on the one hand, the government can decrease the carbon trading price and meanwhile subsidize the new entrants to make M&A investment in green production. On the other hand, the government can increase the carbon trading price while reducing the carbon quota lower than a threshold in the case of greenfield investment in green manufacturer.