A game theoretic approach for pricing, greening, and social welfare policies in a supply chain with government intervention

Abstract It is undeniable that every organization and company will eventually need to move toward sustainability if they wish to survive and remain competitive. In order to attain sustainability, it is very important to optimize all its dimensions at the same time. In this paper, we consider a two-tier model consists of a supply chain and government that government in a higher level role as a leader for the whole supply chain. For both levels, three dimensions of sustainability, namely economic, social and environmental dimensions, are defined and each is considered in modeling. In this paper, consumer surplus is considered as an indicator of social welfare for the social dimension of sustainability, and for the first time, consumer surplus is modeled based on two variables that one is price and other is greening level of the product. Our findings show how the consumer surplus may increase as product price rises. Our findings also show that cooperation between the manufacturer and retailer always lead to produce a greener product, increase the profit of the entire supply chain and increase consumer surplus of customers. Also in models with government intervention, the government imposes (pays) a lower (greater) tax (subsidy) on the final price of the product. We also find that the retail price in the cooperation models always is not lower than that in the noncooperation models which contrasts with the result of ‘double marginalization’. Results also show that different government policies have significant impacts on the profit of the supply chain members as well as on the environment. Incorporating a fraction of consumer surplus in the government utility function has a greater effect on the supply chain members' profit, and on the green degree of the product, than considering environmental concerns. We also propose a contract to coordinate the decentralized supply chain.