A game theoretic framework for post-consumer recycled and new packaging industries (2023)

Packaging is a massive global industry with a multi-billion dollar market value worldwide which is set to grow at a CAGR of 6% from 2019 to 2023(Technavio, 2021). This growing industry is driven by major industrial, consumer, and economic trends. Nowadays, the business model of numerous companies consists of packaging sourced produce/products rather than manufacturing produce/products themselves. For many products/produce, the source might be common (e.g.,bought from the same local market/imported from the same origin). For instance in the tea industry, Lipton tea employs a blend of imported tea from different plantations in Sri lanka, India, China, and Kenya in its tea products(Unilever, 2009). HÄLSSEN & LYON is another importer of all types of tea based in Germany that performs visually pleasant and sustainable packaging to attract more customers(STIR, 2022). As a matter of fact, the top producers of tea worldwide are China, India, Kenya, and Sri Lanka. Later, this tea gets imported, branded, and packaged in many countries(atlasbig, 2021). In the saffron industry, Iran is the leading producer and exporter worldwide with a production of 230 tons in 2019, producing 95 percent of world’s saffron; This saffron is mainly imported by Hong Kong, Spain, and China(statista, 2019OEC, 2020). For chemical derivatives such as petroleum jelly, China is one of the biggest exporters with exports to the Netherlands, US, Canada, and Mexico, etc.(Exportgenius, 2016). Thus, the source of many products such as food produce, chemical products, oil derivatives, is a joint manufacturer/importer. Consequently, for these products/produce innovative and sustainable packaging emerges as the key driver in the product’s overall perceived quality(Wang, 2013,Jabarzare & Rasti-Barzoki, 2020,Wyrwa & Barska, 2017).

Given substantial concerns over global warming, natural resource depletion, overflows of solid waste, population growth and increased pollution, sustainability is a practical remedy to this crisis not to be overlooked. In recent years, the packaging industry has gotten on-board with this trend by adopting sustainable solutions. After all, nearly half of the global waste is due to packaging, with most of them discarded immediately at the time of consumption(Ritchie, 2018). Marine environment and ecosystem are not spared from this severe global issue; plastic waste in oceans injures marine wildlife due to entanglement or plastic ingestion(Sigler, 2014). Facing all these adverse effects and the existing threats of solid waste emboldens the significance of shifting away from conventional packaging towards sustainable alternatives with the viable strategy of deploying Post-Consumer-Recycled (PCR) materials in packaging.

PCR materials can be utilized with new raw materials as feedstock to generate recycled products and packaging(Grosso, Niero, & Rigamonti, 2017). For instance, SKS bottle and packaging was founded in 1986 and is a US-based company that offers green glass bottles, plastic jars and, containers for personal care, cosmetics, perfume, food and beverage, medicinal and household chemical product ( http://sks-bottle.com). It is noteworthy to mention that numerous global companies, including retailers, FMCGs and packaging companies (e.g.Sealed Air Corporation, 7 ALPLA Group and Amcor, PepsiCo, L’Oréal, Unilever, Nestle, Walmart, Carrefour, Schwarz group) have signed a global commitment to address the global plastics waste crisis led by packaging(EllenMacArthurFoundation, 2019). For instance, Unilever is committed to halving the amount of new virgin material in their products by 2025. Veresence, a high-end glass bottle manufacturer for luxury brands such as Bvlgari, has developed high-quality eco-responsible glass bottles with the rate of glass PCR exceeding 25%(Verescence, 2020). While 100% PCR content is technically feasible and accessible in the market, it may exhibit some downsides; For plastic PCR, the quality is compromised by discoloration, clarity, and impact strength(Hopewell, Dvorak, & Kosior, 2009). As an example, for plastic packages, virgin PET or HDPE are added to PCR to achieve both durability and sustainability. For glass PCR, repeated recycling and melting may lower the opacity of glass which results in opaque and darker shades of glasses (seeO.Berk, 2018 for some comparative images). Thus, it can be deduced that while implementing PCR can be an advantageous method for businesses to reduce their environmental footprints, there is the disadvantage of diminished durability and aesthetics of the product.

On the other end of the competing packaging market are companies that conventionally employ new raw materials in their packaging. For these companies, marketers have long realized the power of innovation in packaging to justify price premiums and gain customers’ loyalty. For instance, Amcor packaging is a global packaging founded in 1860 which provides flexible and rigid packaging for food and beverages, home care, and pharmaceutical products and uses innovative technology to enhance the quality of its packaging (http://amcor.com). Packaging innovation provides an excellent opportunity to increase value through effective design; This can be achieved by observing consumers’ behavior and identifying the specific areas of competitive strengths and weaknesses, which ultimately justifies the cost of investment that comes with innovation in the packaging(Young, 2004). For instance, the developed concept of technology packaging in the food industry improves the quality of the packaged product with solutions such as moisture scavengers, ethylene regulators, and antimicrobial packaging(Wyrwa & Barska, 2017).

External forces may steer the packaging companies to adopt an eco-responsible attitude, more specifically the consumers’ eco-conscious behavior and government green policies. With the packaging industry going green and implementing eco-friendly approaches, consumer response to these products should be taken into consideration. Due to rising environmental concerns and a surge in the promotion of sustainability in ads and media, consumers show support for sustainable packaging more than ever before. Indeed, according to research conducted by Trivium Packaging, some 74% of those surveyed are willing to pay more for sustainable packagingTrivium (2020). Moreover, based on a study inMagnier and Schoormans (2015), consumers’ responses depending on their level of eco-consciousness vary to incongruities and visual appearances that might accompany sustainable packaging; The higher (lower) they were concerned with the environment, the less (more) sensitive they were to incongruities in visual appearances of sustainable packages and gave a positive (negative) feedback. To this end, and in order to characterize optimal responses of packaging industries to consumer behavior, we will consider two different settings by (not) considering the eco-conscious consumers in the market.

The other external force not to be neglected is the government regulations. Governments are introducing initiatives to incentivize packaging companies to incorporate sustainable solutions to protect natural resources and reduce waste. One of these initiatives is to impose taxation on new raw materials. Recently, a new tax has taken effect in the UK from April 2022 that applies to plastic packaging not containing a minimum of 30% recycled contentGOV.UK (2020). In the US, new legislation is proposed which creates a tax on virgin resin starting in 2022. These policies aim to provide an economic incentive to recycle and collect plastic waste and provide an equal ground for PCR competition.

In this article, we consider two packaging strategies, namely innovative packaging and PCR materials usage. More specifically, we seek to provide a framework for competition between packaging companies such that one opts for a combination of post-consumer-recycled and new raw materials in its packaging (PCR Co.), while the other conventionally employs new raw material (Virgin Co.) and invests in packaging innovation and technology. Our model is applied to scenarios where packaging plays an integral part in enhancing the product’s perceived quality; This is the case when the source of products are the same producer/importer as in food products such as tea, coffee, rice, saffron, flour, oil derivatives, chemical products such as petroleum jelly etc. Our study is strongly motivated by the ongoing trend among businesses towards green packaging solutions and utilizing PCR materials.

With pricing always being a hot topic for industries, we aim to characterize optimal prices for the two packaging companies by applying game theory. The fact that PCR has historically lower feedstock costs compared to new raw materials incentivizes packaging firms toward PCR materials (noting that outside factors such as the COVID19 pandemic may alter the pricing).¹ Moreover, regions where green packaging is appreciated act as a further stimulus for packaging firms to go green. However, with all the advantages that PCR possesses, there are a series of limitations. Increased PCR usage comes with diminished strength, quality, overall aesthetics, and increased production cost due to the need for high-tech machinery; Hence, the optimal ratio of PCR may become a dilemma for businesses. From an environmental perspective, We investigate this problem from two standpoints: First, we consider the effect of eco-conscious customers on the packaging companies’ optimal decision-making. Second, we consider the effect of taxation on firms not abiding by the least required amount of recycling in their packages.

As part of the contribution of this article, we are aiming to answer the following research questions:

(1) What are the optimal PCR ratio, the optimal Packaging innovation investment and, optimal prices for two competing packaging companies? To the best of our knowledge, this article is the first to study the PCR content in a packaging setting where the other competing firm is investing in packaging innovation, specifically when the packaging firms have the same source of producer/importer.

(2) How will the virgin tax policy impact the PCR usage, packaging quality investments and packaging innovation, and the profitability of the packaging companies?

(3) How does an eco-conscious environment alter the decision-making of the two companies?

The remainder of this article is organized as follows. Section2 covers a brief literature review of existing research. Section3 presents an overview of the base model and further assumptions upon which our study is built. Section4 states the main results for our two scenarios. Section5 showcases the numerical analysis. Section6 provides some further insights into the model and concludes this study along with future research directions. Parametric analysis and all the proofs are relegated to the Appendix.