Abstract

We show that the possibility to recycle a product produces a loss of vertical control in a production channel where one upstream monopolist sells an input to two downstream firms, which transform it into two di↵erentiated products. We set up and solve a two-period game. In each period the upstream firm makes secret TIOLI o↵ers to the downstream firms. One downstream firm can recycle a part of its output and sell it in the second period. If the recycled product is homogeneous to the product of the other firm then recycling creates a cross-product inter-temporal externality that cannot be fully internalized. This entails that the whole surplus of the supply channel is reduced by recycling.
Keywords: Vertical relationships; Circular economy; Recycling.
JEL classification: D43; L13, L14; Q53.

Practical information