Government interventions in closed-loop supply chains with modularity design

Abstract

With the increasing importance of environmental issues, governments have implemented regulations to monitor companies’ recycling of end-of-life products. This study focuses on a closed-loop supply chain of manufacturers investing in modular design. The manufacturer produces new and remanufactured products that have a modular structure and outsources collection activities to a third-party collector. To encourage recycling, different government regulations are introduced under a financial responsibility-sharing mechanism. Our study examines the interaction of governments, manufacturers, and collectors in the Stackelberg game. The impact of changes in the manufacturing and remanufacturing costs of modularity, as well as subsidy and penalty policies on equilibrium outcomes is then investigated. Additionally, different regulations are compared from economic, environmental, and social perspectives. Theoretical and numerical analyses reveal the following important conclusions. Firstly, changes in the manufacturing and remanufacturing costs of modularity have a positive impact on the modularity decision, with the former having a greater effect than the latter. Increased modularity affects product selling, transfer, and acquisition prices accordingly. Secondly, the sharing of government subsidies has no effect on equilibrium outcomes, except for the transfer-price decision. In contrast, the allocation of financial responsibility is a key factor in the performance of the penalty policy. Thirdly, the hazardous cost per unit of unrecovered product is an important factor in regulators’ optimal decisions. Penalty policies perform better in improving social welfare by reducing environmental strain when products heavily pollute the environment; otherwise, subsidy policies that effectively increase economic benefit are superior.