Equilibrium Modeling and Policy Analysis of a Biofuel Supply Chain with a Hydroelectric Reservoir

Abstract

This research proposesd a game theoretic model of a biofuel supply chain (BSC) where a utility company supplies reservoir water to two farmers, located in downstream and upstream of a hydropower dam. The decision-making process of the model is formulated as a three-stage Stackelberg game. We analyze the equilibrium of the decentralized systems and the effect of the government subsidy on energy crop (switchgrass) production for cellulosic biofuel industries, with two forms of subsidy: (1) discriminated subsidies and (2) equalized subsidies. The results show that both forms of subsidy improve social welfare in the BSC unless the amount of subsidy exceeds certain limits, in which case there are negative margins for the farmers, and disappearance or monopoly of the markets. Increasing the subsidy to the upstream farmer is more efficient in improving social welfare than equalizing the subsidies to the two farmers. Increasing the subsidy to the downstream farmer shows the least efficiency in improving social welfare.