The Impact of Cap and Trade Policy on Manufacturer's Operational Decisions with Strategic Customer Behavior

This paper investigates the manufacturer's optimal production, pricing and carbon trading decisions with cap and trade policy and strategic customer behavior, and analyzes the impact of parameters of cap and trade policy on the manufacturer's optimal decisions and maximum expected profit. We formulate an optimization model by introducing cap and trade policy into the newsvendor framework with strategic customer behavior. We characterize the rational expectations equilibrium, and derive the optimal solution to the manufacturer. By sensitivity analysis, we show that the manufacturer's optimal production quantity and price are irrelevant to the cap. However, the optimal production quantity is decreasing in the carbon trading price and the optimal price is increasing in the carbon trading price. Furthermore, we find that the manufacturer's maximum expected profit is increasing in the cap and is decreasing in carbon trading price.