Improving sustainability and social responsibility of a two-tier supply chain investing in emission reduction technology

Abstract

This paper studies a retailer-dominated supply chain including a single upstream manufacturer that produces two substitutable products and a single downstream retailer that undertakes corporate social responsibility activities. The manufacturer is also regulated by a cap-and-trade policy. We first compare two optimization models for a decentralized system, one that does and one that does not incorporate emission reduction technology, to show that the profit of each system member in the former is higher than that in the latter, while the opposite is true for carbon emissions when the technology level invested by the manufacturer is higher than a threshold. To test the performance of the decentralized model that incorporates emission reduction technology, we model a centralized system and reveal that the system profit in the decentralized model is increased and the corresponding carbon emissions generated during production can be reduced. These findings motivate us to propose a revenue and cost-sharing contract to coordinate the decentralized system. The result shows that the economic and environmental sustainability of the decentralized system can be improved. Finally, several managerial implications are derived by conducting a numerical study.