Improving Recycling: How Far Should We Go?

We analyze, in a game-theoretic model, the strategic interaction between competing firms that source their inputs from either primary or recycled material. Because the manufacturers’ primary production today serves as input for the recyclers’ production tomorrow, manufacturers can limit the recyclers’ scale of operation by reducing their output. Improving the recycling process generates then two opposite effects: it reduces primary production tomorrow by exposing manufacturers to stronger competition from recyclers, but it also lowers the manufacturers’ incentives to reduce their primary production today. If primary production exerts a negative externality on the environment, then making the recycling process too efficient might be counterproductive. This intuition equally applies to remanufacturing.