This paper seeks to determine how the double marginalization phenomenon affects pollution accumulation in a bilateral monopoly composed of one manufacturer and one retailer. The environmental consequence of this inefficiency, which emerges under decentralized decision-making in a vertical setting governed by a single-parameter contract, remains yet uncovered in the literature related to pollution control. In the setup of a two-stage game, we investigate the impact of double marginalization for cooperative and non-cooperative equilibria. Given the dynamic nature of the problem, we derive both open-loop and feedback Nash equilibria over finite time horizon and identify which information structure best mitigates the impact of double marginalization on pollution accumulation.
Group for Research in Decision Analysis