Strategic decision-making of competitive manufacturers: Assessing the role of product substitutability in energy performance contracting

Abstract

Maximizing benefits through optimized strategic decisions is a crucial concern in Energy Performance Contracting (EPC) arrangements among competing manufacturers, yet this area remains underexplored. This paper develops a model to examine EPC cooperation between two manufacturers producing substitutable products in a duopoly market. By applying game theory, the study investigates the strategic decision-making processes of these manufacturers, with a particular focus on product substitutability. The analysis of equilibrium outcomes reveals that when both manufacturers engage in EPC, total market output increases. Although EPC results in lower prices, it enhances overall consumer surplus due to the price reduction. Additionally, EPC contributes to a decrease in total energy consumption as the cost of energy-saving service rises. The study find that as product substitutability increases, the sharing ratio determined by the client in the EPC arrangement gradually decreases. Concurrently, the level of energy-saving service provided by the Energy Service Company (ESCO) increases. However, when the cost coefficient of energy-saving retrofitting services is relatively high and the sharing ratio falls within a certain range, the service level initially decreases before rising again. This research offers novel insights into the impact of product substitutability on EPC engagements between two competing manufacturers, providing valuable perspectives on strategic decision-making within a competitive market environment.