Impact of power structure on decarbonizing investment with uncertain innovation: A triple bottom line perspective

Investing in decarbonizing innovation allows a manufacturer to fulfill social responsibilities and maintain competitive advantages, but the stochastic nature of innovation may deter it from doing so. Apart from this intrinsic factor, power as an extrinsic element correlates with a manufacturer’s profit and therefore reshapes its innovation initiative. In this paper, we develop models with power in a dyadic supply chain to investigate the issues of whether a manufacturer should invest in uncertain decarbonizing innovation and how would power affect the investment incentive, firm profitability, consumer surplus, and system performance. First, we derive the conditions under which the manufacturer is profitable to invest under different power structures. Analysis of those conditions indicates that increasing the retailer’s power weakens the manufacturer’s incentive to invest. Second, we find that power benefits the manufacturer, but it may be detrimental to the retailer when investment happens. Moreover, a powerful manufacturer always harms customers, whereas a dominant retailer may not necessarily do. Third, we reveal that when the two firms have a balanced power, the economic performance of the system is higher than when either party dominates; however, this puts an acute strain on the environment due to the most carbon footprint. Finally, our triple bottom line analysis shows that, in equilibrium, the investment may result in a win–win–win or win–win–lose outcome for the firms (profits), consumers (people), and the environment (planet). In addition, these outcomes are more likely to arise as the manufacturer becomes powerful.