Pricing and Environmental Innovation in a Supply Chain with a Risk-averse Retailer

Abstract

This paper develops a Stackelberg game model of a supply chain with one risk-neutral manufacturer and one risk-averse retailer whose customer demand is price and environmental innovation level sensitive to investigate the role of risk attitude and coordination mechanism in a sustainable supply chain. We study the equilibrium price and environmental innovation level decisions in the decentralized and centralized condition separately, together with a generalized revenue-sharing mechanism to coordinate the supply chain. We find that the manufacturer’s environmental innovation level and wholesale price both increase with retailer’s risk aversion level. In the centralized setting, the environmental innovation level is higher than that in the decentralized one while the retail price is higher or not depends on environmental investment efficiency coefficient. Moreover, in the coordinated setting, the retailer decreases transfer price with a lower the environmental investment efficiency coefficient. And the Pareto range of unit share of the retailer shrinks when the demand-enhancing effectiveness of environmental innovation decreases. The findings provide managerial insights about the impact of risk attitude and coordination mechanism in achieving both economic and sustainability goals.