Decentralization or integration: Distribution channel selection under environmental taxation

This study reveals that the environmental tax gets less stringent when the manufacturer's distribution channel becomes more decentralized. Contrary to the classic double marginalization problem, the first implication is that a monopolistic manufacturer benefits from decentralization when its technology is sufficiently polluting. Secondly, with two competing manufacturers, both are more likely to decentralize in equilibrium when their technologies are more polluting. Under certain conditions, decentralized manufacturers may enjoy higher profits thanks to tax cuts without affecting social welfare or consumer surplus. Various extensions of the base models confirm the robustness of the analytical results.