Stackelberg equilibrium strategies and coordination of a low-carbon supply chain with a risk-averse retailer

This paper examines the impact of retailer's risk aversion on the equilibrium strategies and channel coordination in the presence of consumers' low-carbon preference. The stochastic market demand is dependent on the carbon reduction level, advertisement for low-carbon products and their interplay. The mean-CVaR criterion is adopted to measure the risk-averse retailer's objective. The Stackelberg equilibrium carbon reduction level, order quantity and advertising level are derived. We find that the manufacturer's investment in carbon reduction can encourage the retailer to put more effort into advertising and increase the order quantity. All of the carbon reduction levels, advertising levels, and order quantity decrease when the retailer becomes conservative. An option and cost-sharing combined contract is proposed to coordinate the supply chain. We prove that if the trade-off coefficient (the weight that the retailer puts on expected profit) is higher than a threshold, the supply chain can achieve coordination even though the retailer's degree of risk aversion is extremely high. If the trade-off coefficient is below the threshold, the supply chain can be coordinated only if the retailer's degree of risk aversion is not very high. The retailer's risk attitude and option price play significant roles in the profit allocation of the supply chain under coordination. Our numerical examples show that the retailer benefits from a higher degree of risk aversion or a higher option price under coordination.

Automated summary

This paper examines the impact of retailer's risk aversion on equilibrium strategies and channel coordination in the presence of consumers' low-carbon preference. The results show that the manufacturer's investment in carbon reduction can encourage the retailer to put more effort into advertising and increase the order quantity. A combined contract is proposed to coordinate the supply chain, taking into account the retailer's risk attitude and option price.