Review of Industrial Organization
12: 751–765, 1997.
1997 Kluwer Academic Publishers. Printed in the Netherlands.
Raising Rivals’ Costs Strategies via Emission
EFTICHIOS SOPHOCLES SARTZETAKIS
University College of the Cariboo, Department of Economics and Finance, 900 McGill Road, P.O.
Box 3010, Kamloops, B.C., Canada V2C 5N3
Abstract. In the present paper we examine the effect of emissions permit price manipulation within
an oligopolistic model. We examine the effect that positioning strategies in permits markets have on
the degree of competition in the product market as well as on social welfare. The analysis is based
on the concept of raising rivals’ cost strategies. We ﬁnd that competition in the product market can
be lessened substantially. The welfare effect is ambiguous. If the leader expands its market share
at the expense of a less efﬁcient rival, or if it excludes a less efﬁcient entrant, overall efﬁciency
may increase despite the decrease in the industry’s output. When efﬁciency decreases, or when
consumers’ protection is a policy priority, the initial distribution of permits can be used to control
power in the permits market. Such interventions though, improve efﬁciency only when policy makers
have substantial information on the technological structure of the industry, and thus, should be used
with caution. Given the importance of information, sharing of information and coordination of actions
between policy makers is very important.
Key words: Tradeable emission permits, raising rivals’ costs strategies, antitrust policy.
According to the theory of externalities, a proper policy should provide economic
agents with adequate incentives to undertake the right amount of the externality
creating activity. In the case of environmental externalities, this is accomplished
withtheuse oftradeableemission permits. Underidealconditions, including perfect
competition, this policy instrument achieves efﬁciency. Many regulated industries
though, are not competitive, and the markets in which emission permits are traded
may not be competitive either. The literature recognizes that, in the presence of
product market distortions tradeable permits do not yield the optimum allocation
of resources. However, little is still known about the impact of emission permits
market distortions on product market structure, and on social welfare.
I am grateful to Thomas Ross for his encouragement and support through all stages of this
research project. I would also like to thank an anonymous referee of this journal, Donald McFetridge,
Keith Acheson, Steven Ferris and Peter Tsigaris. Participants at the Sixth Annual Conference of the
European Association of Environmental and Natural Resource Economists (Umea, June 1995) have
also contributed with their comments. I gratefully acknowledge ﬁnancial support from the Bureau of
Competition Policy, Industry Science and Technology Canada.