Optimizing and Coordinating R&D Investment in a Decentralized Supply Chain Under Tax Incentives

To improve firms’ enthusiasm for R&D investment, governments worldwide have implemented a series of tax incentives, such as the Super Tax Deduction policy (STD-policy), and the Preferential Income Tax policy (PIT-policy). This article considers a decentralized supply chain, where a supplier conducts R&D activity to improve the quality of its product and then sells it to a retailer who faces a price and quality sensitive demand. We analyze the R&D investment strategy and the corresponding pricing decisions of supply chain players under the two tax incentives. Interestingly, we show that the two tax incentives can not always improve the R&D investment enthusiasm of the supplier. Furthermore, the existence of the PIT-policy poses a technical challenge for coordination, as the wholesale price may not be offset when calculating the total after-tax profits of the two players. We develop a coordination mechanism with three parameters, which has sufficient flexibility to achieve Pareto improvement for both players. We also extend the model by considering continuous product quality, collaborative R&D investment, stochastic market demand, capital-constrained supplier, respectively, and obtain some useful insights.