Welfare‐Reducing Integration Under Emission Taxes and Endogenous Competition Mode

ABSTRACT This study examines asymmetric supply chain competition between integrated and non‐integrated supply chains under emission taxes when firms choose competition mode in the final goods market endogenously. We find that higher emission taxes may lead the non‐integrated downstream firm to adopt aggressive pricing to induce its upstream firm to lower prices, leveling competition with an integrated one. When the non‐integrated chain integrates, however, quantity contracts become dominant strategies, which might distort welfare under lower emission taxes if both environmental damage and product substitutability are sufficiently high. Our finding indicates the welfare‐reducing effects of government interventions post‐integration when emission tax policy and endogenous competition mode are relevant.