Optimal sustainability efforts and pricing policies in a two-echelon supply chain

Abstract

Stakeholders such as governments, NGOs and customers have made businesses to consider sustainable practices in their operations. Achieving sustainability goals, such as for e.g. carbon emissions reduction often requires coordinated efforts between firms across different echelons in supply chains. This paper aims to study this issue of sustainability efforts by firms in a two-echelon supply chain where pricing decisions are also in mix along with emission reduction policy decisions. We consider a channel in which a manufacturer sells through a retailer where retailer is the dominant firm. Both the firms can put efforts to reduce their respective emission levels. We model a Stackelberg game where retailer as the leader determines its retail price (margin) and its emission reduction efforts and the manufacturer responds by determining its wholesale price and its emission reduction effort. The consumer demand is sensitive to retail price as well as total supply chain wide emissions. We also solve the problem of a centralized decision maker which serves as a benchmark solution. We obtain optimal equilibrium policies and obtain useful managerial insights both through analytical as well as numerical means including the sensitivity of optimal decision variables w.r.t. various exogenous model parameters. We find that in the centralized channel the overall sustainability efforts are higher and in addition the consumers also pay a lower retail price in the centralized channel compared to a decentralized one.