The production decisions and cap setting with wholesale price and revenue sharing contracts under cap-and-trade regulation

Abstract

After consideration of a supply chain consisting of a manufacturer and a retailer, this paper uses a two-stage Stackelberg game to explore the production decision as well as the government cap setting with wholesale price and revenue sharing contracts under cap-and-trade regulation. We also compare the total carbon emission and social welfare with the two contracts. We list some main conclusions. Firstly, we find that the government's over-allocated carbon credits may damage the manufacturer's profit with wholesale price or revenue sharing contract, which can increase the difficulty of implementing cap-and-trade regulation. Secondly, we detect that the optimal cap under the two contracts is decreasing or constant in the environmental concern parameter, which means that the government should keep the optimal cap unchanged under the low or high environmental concern parameter, and decrease the cap when the middle environmental concern parameter increases. Thirdly, we show that using green technology may increase the total carbon emission. Finally, we discover that the social welfare with wholesale price contract is less (larger) than that with revenue sharing contract under low (high) value of the environmental concern parameter, and the social welfare with the two contracts is equal to each other under middle value of the environmental concern parameter.

Keywords:

• cap-and-trade regulation
• production
• social welfare
• wholesale price contract
• revenue sharing contract

Acknowledgements

This paper was presented at a research seminar chaired by Professor Fuqiang Zhang from Olin Business School of Washington University in St. Louis in July 2018. We greatly appreciate his patience and insightful suggestions.

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

1 http://www.sohu.com/a/58916853_115428

Additional information

Funding

This work was supported by National Natural Science Foundation of China: [Grant Number 71801211, 71571170, 71520107002]; the Thousand Young Scholar Program of China; the Fundamental Research Funds for the Central Universities of China: [Grant Number WK2040160028]; the China’s Post-doctoral Science Fundation: [Grant Number 2018M632556, 2019T120548].