Value of Bargaining Contract in a Supply Chain System With Sustainability Investment: An Incentive Analysis

Sustainability is a prevalent topic as the consumers and the governments are much more concerned about the environmental pollution. To reduce the carbon emission, in real world practice, governments have executed different forms of policies to motivate the firms to operate in a sustainable manner. This paper aims to examine the value of bargaining contract when the supply chain member invests in the sustainability projects, and explore the effectiveness of the direct (e.g., cash grant) and indirect (e.g., an increased environmental tax rate) subsidies in reducing the total carbon emission. We first derive the optimal pricing and sustainability effort under the wholesale pricing contract when either the manufacturer or the retailer makes the sustainability investment. We then consider the supply chain coordination under the two-part tariff, revenue sharing, and bargaining contracts. We uncover that only the bargaining contract can coordinate the supply chain and a Pareto improvement is achieved when the bargaining power of the manufacturer is in a specific range. Finally, we reveal that both the direct and indirect subsidies can increase the sustainability effort but they are not always an effective tool to reduce the total carbon emissions.