DP16991 Production Agreements, Sustainability Investments, and Consumer Welfare

Author(s): Maarten Pieter Schinkel, Yossi Spiegel, Leonard Treuren
Publication Date: February 2022
Date Revised: March 2022
Keyword(s): Horizontal agreement, investment, sustainability
JEL(s): K21, L13, L40, Q01
Programme Areas: Industrial Organization
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=16991

Schinkel and Spiegel (2017) finds that allowing sustainability agreements in which firms coordinate their investments in sustainability leads to lower investments and lower output. By contrast, allowing production agreements, in which firms coordinate output yet continue to compete on investments, boosts investments in sustainability and may also benefit consumers. We extend these results to the case where investments affect not only the consumers' willingness to pay, but also marginal cost. We show that sustainability agreements continue to lower investments and output levels, while production agreements increase investments but when they benefit consumers, they are not profitable for firms and will therefore not be formed. This implies that exempting horizontal agreements from the cartel prohibition cannot be relied on to advance sustainability goals and satisfy the competition law requirement that consumers must not be worse off.