The Effect of Recycling on Price Competition: Evidence from the United States Paper Industry Eddie Watkins * January 29, 2018 Abstract The United States has experienced a dramatic increase in paper recycling starting in the later half of the 20 th century. I use panel data, between 1973 and 1993, on paper mills in the US to investigate how this change in recycling affected firm production and prices charged to consumers. I develop a model that separately captures the competing effects of recycling: a pro-competitive increase in total supply that lowers market prices, and an anti-competitive strategic response by incumbent firms aimed at limiting the material available to the future recyclers. I quantify the magnitude of these channels to determine the overall effect while allowing for changes in consumer demand and firm heterogeneity. I use the estimates from the model to simulate alternative environmental policies such as taxes on primary production. I compare the benefits of each policy to the cost of implementation to capture the overall welfare of the policy. JEL Codes:L13,L14,Q21,Q23 Keywords:Recycling, Input Markets, Dynamic Incentives 1 Introduction Environmental concerns have led to an increased interest in developing policies to provide incen- tives for the use of environmentally friendly products. Many of the industries impacted by these policies tend to be highly concentrated. Economic analysis has illustrated that environmental policies can have significant impact on market outcomes when firms possess a degree of market power. For example, Ryan (2012) demonstrated that plant-level emission regulations signifi- cantly decreased competition in cement industry. In this paper, I study the effects of policies aimed at addressing concerns about the growth of municipal solid waste facilities (MSW). This * Ph.D. student at the Department of Economics, University of North Carolina at Chapel Hill. E-mail: wewatkin@live.unc.edu. I am thankful for the guidance and advice of my advisor Brian McManus, and com- mittee members: Gary Biglaiser, Peter Norman, Jonathan Williams and Andy Yates. I am also thankful for the comments of the UNC Microeconomics and UNC IO/Theory Dissertation Workshops. I thank Dr. Aselia Urmanbetova for generously providing the Forest Product Laboratory Data. All mistakes are my own. 1