Green technology upgrading choice in a competitive setting: the effect of environmental tax

This research considers a supply chain consisting of a regulator and two symmetric firms where the regulator influences the market by imposing a tax on firms' environmental pollutant emissions. A price competition model is proposed to examine the equilibrium solutions that the two firms can reach in their technology upgrading process, and the effect of the environmental tax is evaluated. The two firms' Nash equilibrium solutions regarding their technology improvement decision show that there is no asymmetric equilibrium. The decision to upgrade or not upgrade may arise in equilibrium, depending on the technology's fixed cost. Besides, a prisoner's dilemma may arise when the two firms do not upgrade their technology, and multiple equilibria may arise when the fixed cost incurred is at a medium level. Technology improvement decision is the dominant strategy when either prisoner's dilemma arises or multiple equilibria arise for the two firms regardless of whether the environmental tax is exogenous given or not. In addition, firms' reactions to environmental tax may be non-monotone. However, the role of the tax on firms' improvement decisions is limited when the regulator further increases the tax. Finally, the optimal tax level for the regulator that can maximise welfare is obtained.