A Dynamic Game of Circular Economy with Environmental Producer Responsibility and Digital Product Passport

Abstract

This paper presents a dynamic game model based on a Circular Economy (CE) system, where players develop strategies to optimize the management of end-of-life and end-of-use goods. Our model emphasizes the importance of knowledge creation through digital systems that enable companies to systematically track goods within the eco-system and align with the recent directives related to the Digital Product Passport (DPP). In our game, an Original Equipment Manufacturer (OEM) invests in the DPP to foster supply chain knowledge, visibility, and improved CE management, while a collector facilitates the efficient collection of products at the end of their life cycle. Our study introduces a novel concept of Shared Environmental Producer Responsibility (SEPR), promoting collaborative accountability among supply chain partners for the environmental impact of goods, thus fostering a holistic view of the supply chain as a single entity responsible for its ecological footprint. The results highlight the conditions under which a SEPR can benefit a CE system using DPP and suggest that, although the SEPR can be seen (in principle) as a penalty mechanism, it allows to coordinate the CE system by promoting the culture of digitalization in CE. Differently, the traditional incentive mechanism based on the number of returns does not coordinate the CE system; the same result holds for the sharing on the pollution constraints imposed by the government, which require more attention from policymakers. Finally, we demonstrate that a control-based incentive is less efficient than state-based incentives, suggesting that policymakers should provide incentives for CE systems to create knowledge over the supply chain and use it to develop efficient coordination mechanisms.