Abstract
We consider a supply chain with an upstream supplier and a downstream manufacturer who invests in innovation. We present an analytical framework for innovation decisions in a centralized, a flexible price and a commitment to price. These results show that the innovation by commitment to price is still insufficient and the supplier remains flexible price beyond a threshold amount of demand uncertainty. To solve this problem, we propose a combination mechanism, which consists of a commitment to price, a cost sharing and a compensation for the risk of demand uncertainty. We study the impact of combination mechanism with endogenous downstream innovation. Our research results show that the innovation by combination mechanism may be greater than or equal to the one by a centralized. More importantly than all of that, the combination mechanism can improve the performance of the supply chain and ensure that both supply chain members achieve a win-win situation.
Highlights
The excessive use of natural resources occasioned by rapid economic growth has damaged the environment and raised many environmental concerns [1] [2]
We develop a framework to study the strategic roles of the commitment to price in a supply chain with downstream innovation
We examine the optimal decisions for innovation in centralized, flexible price and commitment to price
Summary
The excessive use of natural resources occasioned by rapid economic growth has damaged the environment and raised many environmental concerns [1] [2]. Yao et al (2011) [10] use a principal-agent model to study the manufacturers’ problem in inducing suppliers to adopt new technologies, focusing on unobservable adoption costs and investment. They study the impact of different contracts on innovation by focusing on three types of contracts: 1) the wholesale price contract, 2) the quality-dependent wholesale price contract, and 3) the revenue-sharing contract Different from above these literatures, we study the innovation investment decision by the downstream manufacturer, instead of the upstream supplier. Gilbert and Cvsa (2003) [12] examine mechanisms that stimulate downstream innovation in a supply chain They analyze the effect of price commitment by the upstream supplier. 2) How and when can an upstream supplier encourage its downstream manufacturer to invest in innovation while still being able to recoup the benefits of doing so?
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