Watkins, Eddie

Job market paper

The Dynamic Effects of Recycling on Oligopoly Competition: Evidence from the US Paper Industry

When consumers recycle a good, the future supply of intermediate inputs increases. If some of the inputs are used to manufacture a good that competes with the original good, the initial seller faces an incentive to reduce its supply to limit this source of future competition. I illustrate the incentive in a model of dynamic oligopoly, and test the predictions using novel data from the US paper industry between 1973 and 1993. I find that firms decrease quantity in response to policy changes that increase both current and future competition from firms using the recycled input. I then use the model to illustrate two implications: (i) the response to strategic incentives lead antitrust authorities to underestimate the exercise of pre-merger market power, and horizontal mergers let firms internalize their effects on future competition, resulting in a greater supply reduction post-merger, and (ii) policies designed to shift production to environmentally friendly firms are undercut by countervailing supply incentives.