Strategic Green Technology Investment in a Supply Chain under Unobservable Contracts

Abstract

Firms are actively embracing green technology to reduce their carbon footprints, as global consensus on achieving carbon neutrality continues to grow. Upstream or downstream firms are increasingly observed to invest in green technology to make their supply chains more sustainable. Hence, this study considers a supply chain consisting of an upstream manufacturer and two competing downstream retailers and considers two contrastive scenarios where either the manufacturer or the retailers make green technology investments. Particularly, contract terms between the manufacturer and the retailers are assumed unobservable to the retailers. Our findings indicate that, in most cases, the incentives of the manufacturer and the retailers are aligned regarding who should make the green technology investments. Contract unobservability leads to a high (low) green level when the retailers (manufacturer) make(s) green technology investments. Consequently, contract unobservability always makes the manufacturer worse off while making the retailers better off, and interestingly, intense price competition between the retailers amplifies the effects of contract unobservability. Moreover, we find contract observability always leads to a smaller wholesale price but a higher fixed fee under two-part tariff contract while it reduces profitability for both manufacturer and retailers under back-back contract. Our results provide valuable insights into green technology investments under contract unobservability, informing strategies for promoting sustainability within supply chains.

Keywords

Supply chain management / sustainability / green technology investment / contract unobservability / downstream competition

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