Not everything is green in the green transition: Theoretical considerations on market structure, prices and competition

Abstract

This paper studies how the green transition towards a more sustainable and environmentally friendly economy affects the market structure and the competition between firms. In this context, we propose a two-stage game-theoretical model of competition between firms in prices and green investments. The model delivers several scenarios but two are particularly concerning. One such scenario is called the “dirty” equilibrium, in which firms delay the green transition investments. The other scenario is called the “partial green” equilibrium scenario, in which one firm makes the green transition investments obtaining a leading position, while the other remains producing the “dirty” product. In addition to the associated environmental damages, both scenarios are also problematic because they reduce market competition and the number of firms. In this respect, the “partial green” equilibrium may be even more problematic in the long-run because the green leader may perpetuate its advantage towards some kind of monopoly or market power. Inflation and less competition are particular robust implications of the green transition process that are found in this paper.