Environmental Standards under International Oligopoly

We explore the effects of domestic environmental standards when a domestic firm and a foreign rival compete in the domestic market. We focus on a situation where the introduction of environmental standards forces the foreign product out of the domestic market because it does not meet the standards. Such prohibitive standards may induce the foreign firm to produce an environmentally friendly good through R&D or licensing obtained from the domestic firm. However, this does not guarantee that the product, which now complies with the environmental standards, will improve the environment. In the case of licensing, governments may intervene to shift the rent from the domestic firm. In certain circumstances, the shifted rent could exceed the amount paid by the foreign firm for licensing.