Price Competition and Product Differentiation when Goods have Network Effects

The objective of our approach is to develop a model which captures horizontal product differentiation under environmental awareness, product innovation under network effects, and price competition whereby environmentally friendly products are costlier to produce. As an example, we refer to automobile producers, offering cars with a gasoline powered engine and one with a natural gas powered engine. The network of petrol stations provide the complementary good. The fulfilled expectation equilibrium could be either one with the firm offering the conventional engine as the only producer, one with the firm offering the new technology as the only producer, or one in which both firms share the market. Which equilibrium will emerge depends on the cost of producing energy efficient engines and on environmental awareness of the consumers. Due to the latter aspect the innovative firm has a chance to enter the market. We use a two stage game in prices and characteristics to analyse the respective market structure. We show that if environmental awareness is strong, the firm with the conventional technology will improve energy efficiency of its product. If the network effect is weak, both firms will be in the market. Prices and profits will decline if the role of the network effect becomes important. In order to find out whether private decision on the type of engine coincides with a socially optimal product differentiation, we determine the position of the two types of engine by a welfare maximizing authority.Price competition; Quality competition; Environmental awareness; Network effects; Automobiles.

The Optimal Path of Energy and CO2 Taxes for Intertemporal Resource Allocation

The purpose of this paper is to extend the dynamic resource allocation problem by including stock externalities like accumulated CO2 and SO2 emissions as well as flow externalities like waste of energy or pollutants which can be abated (SO2). The objective is to examine how the evolution of energy-, CO2- or SO2-tax rates can address these problems in an optimal way. The concern about the time profile of an energy tax arises from the fact that fossil fuels are an exhaustible resource and that global warming, being a consequence of carbon accumulation in the atmosphere, is a stock externality problem. We use a micro model of a firm, which maximizes profits, uses energy as one of its inputs and is confronted with a varying energy tax. It reacts by substitution, by changing its output level, by investing in energy efficient technology or by purchasing abatement equipment. The government is well aware about firms reaction on price signals. It maximizes a stream of social welfare by choosing an optimal path of its instrument – an energy tax. Our analyses supports the idea of a first rising and later falling tax over time.

Price Competition and Product Differentiation when Consumers Care for the Environment

Increasing environmental awareness may affect the pleasure of consuming a good for which an environmental friendly substitute is available. When deciding to buy differentiated products, a compromise is sometimes made between preferred characteristics of the good and its environmental properties. In this paper we investigate the market implication of product differentiation when customers are concerned about environmental aspects of the good. We use the spatial duopoly model to determine how environmental concern affects prices, product characteristics and market shares of the competing firms. Our analysis is based on a two-stage game where at the first stage each firm chooses the characteristic of its product. At the second stage each firm chooses its price. The unique equilibrium prices and market shares are affected by consumer awareness of the environment and by the higher costs for producing those goods. As for the Nash equilibria in the characteristics we find three equilibria depending on the parameter constellation. In order to find out whether the market functions in an optimal way we determined the choice of environmental characteristics by a welfare maximizing authority. The result of this analysis is that characteristics differ under private decision making and social one. It can be shown, however, that it is possible to choose environmental policy instruments in order to stimulate private firms to produce the social optimal qualities.Price competition, Quality competition, Environmental awareness, Environmentally friendly products

Molecular Computing: from conformational pattern recognition to complex processing networks

Natural biomolecular systems process information in a radically different manner than programmable machines. Conformational interactions, the basis of specificity and self-assembly, are of key importance. A gedanken device is presented that illustrates how the fusion of information through conformational self-organization can serve to enhance pattern processing at the cellular level. The device is used to highlight general features of biomolecular information processing. We briefly outline a simulation system designed to address the manner in which conformational processing interacts with kinetic and higher level structural dynamics in complex biochemical networks. Virtual models that capture features of biomolecular information processing can in some instances have artificial intelligence value in their own right and should serve as design tools for future computers built from real molecules

Recycling of eco-taxes, labor market Effects and the true cost of labor - A CGE analysis

Computable general equilibrium (CGE) modeling has provided a number of important insights about the interplay between environmental tax policy and the pre-existing tax system. In this paper, we emphasize that a labor market policy of recycling tax revenues from an environmental tax to lower employers’ non-wage labor cost depends on how the costs of labor are modeled. We propose an approach, which combines neoclassical substitutability and fixed factor proportions. Our concept implies a user cost of labor which consists of the market price of labor plus the costs of inputs associated with the employment of a worker. We present simulation results based on a CO2 tax and the recycling of its revenues to reduce the non-wage labor cost. One simulation is based on the market price of labor and the other on the user cost of labor. We found a double dividend under the first approach but not under the second one.market-based environmental policy, carbon taxes, double dividend, computable general equilibrium modeling

A Theory of Production with Waste and Recycling

The management of solid waste has become an urgent problem. Product responsibility means that a product will accompany its producer from cradle to grave; prevention, recycling and disposal of waste are part of a theory of the firm which we develop under solid residual management. We assume that the government stimulates firms to enhance recycling of resources by a fee on waste. A comparative statics analysis shows the impact of a fee on waste reduction, on the structure of the production process, on recycling, on input demand, material saving effort, number of firms, and on the amount of waste disposal

Price Competition and Product Differentiation when Consumers Care for the Environment

Increasing environmental awareness may affect the pleasure of consuming a good for which an environmental friendly substitute is available. When deciding to buy differentiated products, a compromise is sometimes made between preferred characteristics of the good and its environmental properties. In this paper we investigate the market implication of product differentiation when customers are concerned about environmental aspects of the good. We use the spacial duopoly model to determine how environmental concern affects prices, product characteristics and market shares of the competing firms. Our analysis is based on a two-stage game where at the first stage each firm chooses the characteristic of its product. At the second stage each firm chooses its price. The unique equilibrium prices and market shares are affected by consumer awareness of the environment and by the higher costs for producing those goods. As for the Nash equilibria in the characteristics we find three equilibria depending on the parameter constellation. In order to find out whether the market functions in an optimal way we determined the choice of environmental characteristics by a welfare maximizing authority. The result of this analysis is that characteristics differ under private decision making and social one. It can be shown, however, that it is possible to choose environmental policy instruments in order to stimulate private firms to produce the social optimal qualities

Price Competition and Product Differentiation when Goods have Network Effects

The objective of our approach is to develop a model which captures horizontal product differentiation under environmental awareness, product innovation under network effects, and price competition whereby environmentally friendly products are costlier to produce. As an example, we refer to automobile producers, offering cars with a gasoline powered engine and one with a natural gas powered engine. The network of petrol stations provide the complementary good. The fulfilled expectation equilibrium could be one with either the firm offering the conventional engine as the only producer, or one with the firm offering the new technology as the only producer, or one where both firms share the market. Which equilibrium will emerge depends on the cost of producing energy efficient engines and on environmental awareness of the consumers. Due to the latter aspect the innovative firm has a chance to enter the market. We use a two stage game in prices and characteristics to analyse the respective market structure. We show that if environmental awareness is strong, the firm with the conventional technology will improve energy efficiency of its product. If the network effect is weak, both firms will be in the market. Prices and profits will decline if the role of the network effect becomes important

Voluntary Environmental Agreements, Emission Taxes and International Trade: The Importance of the Timing of Strategies

The purpose of the paper is to narrow the gap between the widespread use of voluntary agreements and research on the rationale of such approaches. A topical example are voluntary agreements of many industries to reduce carbon dioxide emissions because of global warming. If the industry anticipates that taxes and fees will be introduced in the coming years, it seems rational to act in advance in order to mitigate the tax levels. The conventional approach in strategic trade and tax models was to look at a two-stage game where governments set taxes first and then firms react. In such a policy regime the government is concerned about the international competitiveness of its firms and sets taxes below marginal damages. In this paper, we consider a policy regime with a reversed timing. Firms commit themselves in the face of emission taxes to abatement efforts and to lower levels of the environmentally intensive output. Then the government introduces the tax. Under this timing of strategies the tax is equal to marginal damage. Firms waive profit and reduce output in order to use less of the polluting input. The reward for this behavior will be a less strict use of policy instruments and hence lower abatement costs in the near future

Network effects, Compatibility and the Environment : The Case of Hydrogen Powered Cars

The paper addresses the problem of entry barriers for a new technology – hydrogen powered cars or cars with fuel cell engines – if the network of its filling stations is missing or thin. We use Hotelling's model of product differentiation to characterize a situation where an incumbent firm produces the old technology, compatible with the existing network of filling stations, and an entrant, who cannot use this network for its products. We assume that the entrant has to invest in remodeling existing filling stations for making them compatible. This, however, raises his costs. In the intertemporal setting of our model, the Hotelling pricing rule for exhaustible resources encourages the entrant to invest in compatibility because the price of gasoline will rise in the long run to the price of the backstop technology - fuel cells. Depending on the cost of compatibility, our model indicates three possible outcomes. Either, the costs of compatibility are too high and governmental support is required. Or the incumbent bears losses in initial periods by waiting for profits in later periods when full compatibility of the network is reached. Or the entrant benefits from the fact that the price of oil reaches the price of the backstop technology (full cells) rather soon