Motivating Suppliers' Sustainability Performance via Investments in Pollution Abatement Innovations

We consider the actions of two suppliers investing in pollution abatement innovations and also choosing end-of-pipe pollution reduction levels when the buyer chooses different sourcing strategies. To encourage improvements in environmental performance of suppliers in emerging economies, the buyer either sources from both suppliers and allocates more market share to the one with better environmental performance, or sources from only one supplier and gives the one with better environmental performance a higher chance of winning the contract. We consider two dimensions of a buyer's choices: the sourcing strategy (single vs. dual sourcing) and the order allocation mechanism (either linear or proportional). Through equilibrium analysis of this stylized model, we study whether the action of one supplier on investing in pollution abatement will always improve both suppliers' end-of-pipe pollution reduction levels under the various scenarios described. We examine which sourcing strategy encourages more supplier investment in pollution abatement and which strategy results in a higher total production reduction level for the entire supply chain. We also study the buyer's optimal choices of contract terms (the wholesale price and the order adjustment parameter of the order allocation mechanism) to balance her economic objective with her sustainability objective.