Environmental Policy in an International Duopoly: An Analysis of Feedback Investment Strategies

Abstract

This paper discusses environmental policy instruments in a differential-game model of international trade with oligopolistic competition. Strategic interactions occur if firms use feedback strategies and therefore react on decisions of their competitor. Eventually this harms firm profits, because all firms act strategically. A firm reacts differently if its competitor is subject to an environmental standard than if it is subject to an environmental tax. Under open-loop investment strategies and feedback strategies of energy use, environmental taxes always give rise to more investment for strategic reasons than standards. This confirms results of multistage staticmodels of the same problem. The new result is that under feedback investment strategies the reverse can be the case.Environmental policy competition;Duopoly;Differential game