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.
Groupe d’études et de recherche en analyse des décisions