Environmental Taxes in Newsvendor Supply Chains: A Mean-Downside-Risk Analysis

Abstract

Nowadays, governments all around the world have implemented rules and launched legislation to enhance environmental sustainability. Supply chain systems are hence operated under different forms of legislation, such as the carbon tax or extended producer responsibility tax. In this paper, we examine the newsvendor model-based supply chain systems with the consideration of all common forms of environmental taxes. We highlight how the retailer’s risk attitude and the number of consumer returns affect: 1) supply chain operations; 2) performances of the environmental taxes; and 3) supply chain coordination (i.e., optimization). To be specific, we derive the optimal inventory decisions of the retailer when she is risk neutral and risk averse, respectively. We then uncover how environmental taxes and consumer returns affect the retailer’s optimal inventory decisions under different risk attitudes. We further explore the supply chain coordination challenge under three different contracts, characterize their flexibility in coordinating the channel and discuss the impacts of the environmental taxes and consumer returns on each coordination mechanism. Our analytical results show that the two-part tariff contract can achieve coordination for the case with a risk neutral retailer only, while markdown sponsor (MDS) contract and revenue-sharing policy (RSP) can achieve coordination for both risk neutral or risk averse retailer cases. Besides, we reveal that the examined contracts can coordinate the supply chain with a risk neutral retailer more flexibly than that with a risk averse retailer. Finally, by comparing between the MDS contract and RSP, we find that the environmental taxes and the consumer returns will affect the coordination mechanism differently toward the risk neutral and risk averse retailers. Impacts brought by the consumer returns are also explored.