Decisions on Pricing, Sustainability Effort, and Carbon Cap under Wholesale Price and Cost-Sharing Contracts

Rapid economic growth and industrialization have brought material abundance and convenience, but also social and environmental problems such as global warming, climate change, and ozone depletion. For this reason, the public and governments have continued to make efforts to reduce carbon oxide emissions worldwide over the past few decades. To achieve this mission, cap-and-trade regulations have been introduced as one of the most effective market-based mechanisms to control carbon emissions. Accordingly, sustainability efforts, including the development of green products and innovating manufacturing technologies, are being made by companies in supply chains to reduce their carbon emissions. In the context of sustainability innovations and carbon emission constraints, this article investigates pricing decisions, the degree of sustainability efforts, and carbon caps under two different supply chain contracts—in this case, wholesale price contract and cost-sharing contract. This article establishes a Stackelberg game model under each of the supply chain contract types and presents the equilibrium decisions made by players of the game. Major findings of this article reveal that (i) the performance of the supply chain is considerably affected by the presence of a carbon cap; (ii) the higher the carbon cap set by a government is, the more sustainability innovation efforts the supply chain makes; and (iii) the supply chain can improve its profitability and its sustainability under a cost-sharing contract.