To abate, or not to abate? A strategic approach on green production in Cournot and Bertrand duopolies

This research analyses firms' strategic choice of adopting an abatement technology in an environment with pollution externalities when the government levies an emission tax to incentivise firms to undertake emission-reducing actions. A set of different Nash equilibria – ranging from dirty to green production – arises in both quantity-setting and price-setting duopolies. Results show that if societal awareness towards a clean environment is relatively low (resp. high) and the index measuring the relative cost of abatement is relatively high (resp. low), the strategic interaction between two independent, competing, and selfish firms playing the abatement game leads them not to abate (resp. to abate) as the Pareto efficient outcome: no conflict exists between self-interest and mutual benefit to not undertake (resp. to undertake) emissions-reducing actions. Multiple Nash equilibria or a “green” prisoner's dilemma can also emerge in pure strategies. When the choice of adopting a green technology is an anti-prisoner's dilemma (deadlock), the society is better off, as social welfare under abatement is always larger than under no abatement. These findings suggest that living in a sustainable environment encourages the improvement of public education systems for the achievement of an eco-responsible attitude and the development of clean technologies through ad hoc R&D.