Design Incentives Under Collective Extended Producer Responsibility: A Network Perspective

AbstractA key goal of Extended Producer Responsibility EPR legislation is to provide incentives for producers to design their products for recyclability. EPR is typically implemented in a collective system, where a network of recycling resources are coordinated to fulfill the EPR obligations of a set of producers, and the resulting system cost is allocated among these producers. Collective EPR is prevalent because of its cost efficiency advantages. However, it is considered to provide inferior design incentives compared to an individual implementation where producers fulfill their EPR obligations individually. In this paper, we revisit this assertion and investigate its fundamental underpinnings in a network setting. To this end, we develop a new biform game framework that captures producers' independent design choices noncooperative stage and recognizes the need to maintain the voluntary participation of producers for the collective system to be stable cooperative stage. This biform game subsumes the network-based operations of a collective system and captures the interdependence between producers' product design and participation decisions. We then characterize the manner in which design improvement may compromise stability and vice versa. We establish that a stable collective EPR implementation can match and even surpass an individual implementation with respect to product design outcomes. In particular, we show that when the processing technology efficiency and product recyclability are substitutes complements, a recycling network where processor capacity pooling leads to sufficiently low high cost reduction will lead to superior designs in the collective system and maintain its stability, and we propose cost allocation mechanisms to achieve this dual purpose.The online appendix is available at https://doi.org/10.1287/mnsc.2017.2897. This paper was accepted by Serguei Netessine, operations management.