Collusion Helps Abate Environmental Externalities: a Dynamic Approach

We investigate the bearings product market collusion on the abatement of polluting emissions in a Cournot oligopoly where production entails a negative environmental externality. We model the problem as a differential game and investigate the feedback solution of two alternative settings: a fully noncooperative oligopoly and a cartel maximising the discounted profits of all firms in the industry. Our analysis proves that the output reduction entailed by collusive behaviour may have a beneficial effect on steady state welfare, as a result of the balance between a higher market price and a lower amount of polluting emissions. This result opens a new perspective on the debate about the management of environmental externalities, which so far has mainly focussed on the design of Pigouvian taxation.Copyright c © 2008 IFAC