Differential Game Analysis of Carbon Emission Reduction Effect and Price Strategy Considering Government Intervention and Manufacturer Competition

ABSTRACT Governments and enterprises are paying more and more attention to carbon emissions. Considering the dynamic of carbon emissions reduction (CER) and the government intervention, this study discusses the optimal CER effort level, price, and government intervention intensity in a two‐echelon supply chain consisting of a government and two manufacturers. The two manufacturers have two competitive behaviors: Cournot and Stackelberg. Two differential game models are constructed for the two different behaviors, and the optimal decisions under the two models are obtained. The comparisons of these optimal solutions are analyzed, and the influence of some parameters on the optimal solution in the two models is investigated under two scenarios. Furthermore, the optimal government intervention intensity is obtained with the goal of maximizing government utility. The results show that the Stackelberg game allows manufacturers to achieve higher profits and CER but is disadvantageous to consumers, and the manufacturer as the leader has a first‐mover advantage. Fierce market competition leads to greater CER and profits, but higher prices reduce consumer surplus. Larger penalties can promote enterprises to reduce carbon emissions when carbon emissions are large. Compared with the Cournot behavior game, the Stackelberg allows manufacturers to obtain higher profits and CER, but the prices are higher that are detrimental for consumers. The fierce market competition is good for manufacturers, the environment, and the society, but it reduces the consumer surplus. The low CER efficiency causes high costs and reduces the manufacturer's motivation to CER, which harm the environment and reduce profits. The government intervention is negatively correlated with the intensity of market competition and the sensitivity of manufacturers to policies.