To Cooperate with a Third Party or Not? Material Manufacturers' Decisions in a Competitive Environment Under the Energy Performance Contracting Mechanism

2 Pages Posted: 14 Jul 2019

See all articles by Hongping Yuan

Hongping Yuan

Guangzhou University

Wenjie Zhang

Southwest Jiaotong University

Jing Liu

Southwest Jiaotong University

Date Written: June 2, 2019

Abstract

In the increasingly competitive market of building materials, the technology-disadvantaged manufacturer lies in an inferior status because it consumes more energy. To eliminate this inferiority, the technology-disadvantaged manufacturer often seeks to cooperate with some technology-advantaged manufacturers or a third party. However, in such circumstances, the inferior manufacturer normally has to pay a certain cooperation fee (i.e., the cooperation cost), which undoubtedly increases the difficulty of cooperation and subsequently affects the willingness and feasibility of cooperation for the inferior manufacturer, especially those with shortage of funds. In addition, considering the protection of private information, such as trade secrets and production technology secrets in the same industry, the inferior manufacturer will be reluctant to cooperate with the technology-advantaged manufacturer in the same industry. Therefore, how to achieve technological transformation or technology upgrade while minimizing the cooperation cost has become a challenging problem for the inferior manufacturer. Through developing game theory based models, we aim to investigate the strategy of the inferior manufacturer on whether to cooperate with a third party under the Energy Performance Contracting (EPC) mechanism in a duopoly building-materials market. The results show that: (i) cooperation with the third party under EPC mechanism could contribute to achieving technological transformation (or technology upgrade) for inferior manufacturer without the cost of cooperation. (ii) the inferior manufacturer would decide whether to cooperate with the third party based on four major factors including the technical difficulty of product energy-consumption reduction, the technical difference in energy consuming for unit product between the two manufacturers, the market size and the revenue sharing ratio for the third party. Specifically, when the technical difficulty is small, the cooperation is only related to the revenue sharing ratio. However, when the technical difficulty is large, the cooperation is related to three factors encompassing technical differences in energy consuming for unit product between the two manufacturers, the market size and the revenue sharing ratio for the third party. (a) When the technical difference is large, the inferior manufacturer would not cooperate with the third party; (b) when the technical difference is small but the market size is large, the inferior manufacturer would cooperate with the third party; however, (c) when the technical difference is small and the market size is small, the inferior manufacturer would cooperate with the third party only if the revenue sharing ratio lies in a specific area. (iii) The level of energy-consumption reduction by the third party is related to the technical difficulty of product energy-consumption reduction. When the technical difficulty is small, the third party could reduce the energy-consumption level of the technology-disadvantaged manufacturer to the energy-consumption level equal to the technology-advantaged manufacturer. However, when the technical difficulty is large, the third party could reduce the energy-consumption level of the technology-disadvantaged manufacturer to the optimal level. Finally, (iv) when the inferior manufacturer cooperates with the third party, it would reduce the market equilibrium price as well as the profit of the entire supply chain, improve the market equilibrium sales and increase consumer surplus in the whole supply chain. This research enlightens following implications. First, the cooperation with the third party under EPC could effectively help the technology-disadvantaged manufacturer in the building materials market to achieve technological transformation (or technology upgrade) without burdening additional cooperation costs, which provides a new and feasible technical cooperation path for the inferior manufacturer. Second, the cooperation with the third party under EPC not only improves the production technology level of the entire building materials market, but also brings considerable benefits to consumers.

Suggested Citation

Yuan, Hongping and Zhang, Wenjie and Liu, Jing, To Cooperate with a Third Party or Not? Material Manufacturers' Decisions in a Competitive Environment Under the Energy Performance Contracting Mechanism (June 2, 2019). Abstract Proceedings of 2019 International Conference on Resource Sustainability - Cities (icRS Cities). Available at SSRN: https://ssrn.com/abstract=3410337 or http://dx.doi.org/10.2139/ssrn.3410337

Hongping Yuan (Contact Author)

Guangzhou University ( email )

School of Management, Gaungzhou University
Pan Yu District, Guangzhou
Guangzhou, 510006
China

Wenjie Zhang

Southwest Jiaotong University ( email )

1 Jingqu Rd
Chengdu, Sichuan
China

Jing Liu

Southwest Jiaotong University ( email )

1 Jingqu Rd
Chengdu, Sichuan
China

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