Incentive mechanisms in a green supply chain under demand uncertainty

Abstract

This paper studies a couple of incentive mechanisms for collaborative enhancing the green degree of products in a retailer-driven supply chain consisting of one risk-averse downstream retailer and one risk-averse upstream supplier under demand uncertainty. The retailer, acting as the Stackelberg leader, decides the retail price of green products. While the supplier, acting as the follower, is answerable for the green degree of products. We provide three contracts in order to enhance the green degree of products: wholesale price contract, reward contract without target green degree, and reward contract with target green degree. Then, we make out the influence of the retailer’s incentive on the supplier’s green efforts through the above contracts and the impact of the members’ risk aversion preference on the supply chain performance. The analytical results imply that the proposed incentive mechanisms can contribute to the product greenness and the overall utility improvement of the supply chain. Furthermore, under the reward contract with target green degree, the supplier is promoted to produce the greenest products and the overall utility of the supply chain can be the largest among the above three contracts. The results also suggest that the risk aversion attitudes of supply chain members have an adverse effect on the utilities of themselves and the whole supply chain. Finally, based on theoretical analysis and numerical studies, we provide both managerial and practical suggestions for green supply chain management.