Low-carbon supplier selection in the presence of government subsidy

Abstract

Given that the impact of consumers' environmental awareness and government subsidies on retailer sourcing has not been adequately examined in previous research, our study examines the impact of government subsidies on a retailer's low-carbon sourcing strategies. We define a parameter that characterizes the efficiency of government subsidies and build a game theoretical model that includes an ordinary supplier, a low-carbon supplier, and a retailer. The retailer's sourcing strategies include three options: only ordinary products (O), only low-carbon products (L), and both ordinary and low-carbon products (D). Our analysis shows the following results: First, when the retailer's environmental awareness exceeds a certain threshold, the retailer sources either low-carbon products or a combination of ordinary and low-carbon products. Otherwise, the retailer sources both ordinary and low-carbon products. Second, when the retailer's environmental awareness is relatively high, the government adopts a nonsubsidy policy regardless of the product's abatement level. However, when the retailer's environmental awareness is relatively low, the government's policy depends on the abatement level of the product: It provides a subsidy if the abatement level is low and no subsidy if the abatement level is high. Third, government subsidies to the retailer are not always an effective means of increasing social welfare. Our results have important implications for the design of effective government subsidy policies.