State- and Control-Dependent Incentives in a Closed-Loop Supply Chain with Dynamic Returns

Abstract

This paper analyzes two incentive schemes available for a closed-loop supply chain (CLSC) in which a manufacturer and a retailer contribute to the return rate dynamics through their investments in green activity programs. Both firms have economic motivations to perform the return rate because customers who return end-of-use goods also repurchase new ones. In addition, the manufacturer exploits the returns’ residual value in operations to increase profits. Because the manufacturer has both operational and marketing motivations to close the loop, he can provide an incentive to the retailer to boost her investments in green activity programs. The incentive can be either state dependent or control dependent. The former assumes that the incentive depends on the fraction of customers who are willing to return end-of-use products; the latter is proportional to the retailer’s green activity programs efforts. Our results show that a state-dependent incentive is profit-Pareto-improving only when the retailer’s environmental effectiveness is large. In contrast, a control-dependent incentive mechanism is profit-Pareto-improving for low incentive values, high retailer’s environmental effectiveness, and customers’ repurchasing intention. In all other cases, players have divergent preferences and neither mechanism coordinates the CLSC.