The Impact of Government Subsidies and Retailer Contracts on Product Recovery

Abstract

Conducting product recovery and remanufacturing not only help manufacturers decrease the unit cost of production, but also benefit the environment. However, most manufacturers are hampered by the huge initial investment of related operations. In order to alleviate the manufacturers’ financial pressure of product recovery and remanufacturing, some governments implement the production subsidy (subsidy P) and recycling subsidy (subsidy I). Meanwhile, retailers can provide the revenue-sharing contract (contract S) and cost-sharing contract (contract C). Hence, this paper mainly studies the incentive designs of the government and retailer, and the effects of these incentives on the closed-loop supply chain. We first establish a Stackelberg game model consisting of a government, a manufacturer and a retailer, then investigate and compare the optimal decisions and payoffs of each member under each incentive combination of the government and retailer. Our results first show that, on the other hand, the government’s subsidy type cannot affect the retailer’s design of contract C, but subsidy I can induce the retailer to share a higher rate of sale revenue, comparing to subsidy P. On the other hand, the retailer’s contract S could induce the government to increase subsidy rate in most cases, comparing to contract C. Second, the subsidy P can always lead to a higher collection rate, lower wholesale and retail prices, and higher payoffs for the government, manufacturer and retailer, comparing to subsidy I. Besides, under subsidy I, contract S always leads to a higher collection rate, lower wholesale and retail prices, and higher payoffs for the government, manufacturer and retailer, comparing to contract C. However, under subsidy P, contract S can lead to a higher collection rate, a lower wholesale price, and higher payoffs for the manufacturer and retailer, comparing to contract C only when the manufacturer’s recovery efficiency is high. Moreover, the retail price is always higher and the government payoffs is always lower under contract C. Third, the government prefers to implement the subsidy P and then which contract is chosen by the retailer depends on the collection efficiency of the manufacturer. Therefore, subsidy P combining with contract S or C is the equilibrium incentive combination.