Impacts of horizontal integration on social welfare under the interaction of carbon tax and green subsidies

Both a carbon tax and green subsidies are efficient approaches to limit greenhouse gas emission. However, interactions between these two policies remain a critical gap area. In this paper we consider a channel structure originally consisted of two manufacturers and two retailers each of whom sells only one manufacturer's product exclusively. The products produced by the two manufacturers are substitutable. The government subsidizes consumers who buy low carbon products but imposes a carbon tax on the manufacturer producing high carbon products. We analyze tripartite games among manufacturers, retailers, and the government when horizontal integration between manufacturers or retailers is presented. It is a common belief that horizontal integration reduces competition and thus causes a loss in social welfare. However, we find that, with government intervention, neither type of horizontal integration has an effect on social welfare. Although horizon integration may change the optimal subsidy and carbon tax levels, it has no effect on the equilibrium demands for both products. We also show that the integration of manufacturers does not affect retailers' profits, but the integration of retailers hurts both manufacturers due to the direct head-to-head competition.