Computers & Industrial Engineering 197 (2024) 110573

Contents lists available at ScienceDirect

Computers & Industrial Engineering

journal homepage: www.elsevier.com/locate/caie

Decarbonizing a supply chain with an unreliable supplier: Implications for

profitability and sustainability✩
Wenju Niu a , Weili Xue b , Jing Xia c ,∗, Fang Lu d
a
Department of Logistics Management, Nanjing University of Finance & Economics, Nanjing 210023, China
b
School of Economics and Management, Southeast University, Nanjing 211189, China
c
School of Management, Nanjing University of Posts and Telecommunications, Nanjing 210003, China
d
Business School, Xiangtan University, Xiangtan 411105, China

ARTICLE INFO ABSTRACT

Keywords: The increasing emphasis on corporate social responsibility has led to a growing trend among firms to
Supply chain decarbonization initiate decarbonization campaigns, aligning their sustainability efforts with profitability objectives. This paper
Unreliable supplier explores the challenge of decarbonizing a supply chain wherein a buyer cooperates with an unreliable supplier
Power structure
that possesses private absorptive capacity and varying degrees of bargaining power. We develop models based
Triple bottom line
on whether the absorptive capacity remains private information and whether the buyer has more bargaining
power in determining the profit-maximizing price. Our findings indicate that the buyer may opt to avoid
entering into contracts with the supplier for decarbonization if the absorptive capacity ratio falls below certain
values. When contracting occurs, decarbonization has the potential to yield a mutually beneficial outcome
for firms, customers, and the environment. Nevertheless, the presence of private information has negative
implications for customers and the environment because it results in reduced consumer surplus and increased
carbon footprint. As the buyer’s bargaining power strengthens, the likelihood of supply chain decarbonization
increases, potentially leading to more consumer surplus and less carbon footprint. Finally, we discuss the effects
of key model factors from a triple bottom line perspective (i.e., profit, people, and the planet).

1. Introduction of suppliers finds themselves hindered in this pursuit due to various

constraints such as challenging market conditions and the overarching
Over the past decade, there has been a burgeoning trend in integrat- impact of global economic downturns. Recognizing this predicament,
ing sustainability efforts into firms’ operational models, with the aim there is a growing willingness among buyers to support their suppliers
of achieving a seamless alignment with corporate social responsibility in the journey towards supply chain decarbonization. For example,
(CSR). This strategic shift not only fosters a harmonious coexistence IKEA offers support to suppliers, such as investments that facilitate
of sustainability and profitability targets but also responds to the esca- the transition to green materials, within its supply chain to enhance
lating consumer awareness regarding the environmental ramifications the sustainability of operations.2 JD.com, a pioneering e-commerce
of their purchases. With supply chain emissions exceeding those from retailer in China, is dedicated to collaborating with its suppliers and
a corporation’s direct operations by a factor of 11.4, buyers are in- has launched the ‘‘Green Stream Initiative’’. This program has effec-
creasingly advocating for the decarbonization of their suppliers through tively engaged over 300,000 suppliers, including industry giants P&G,
environmentally conscious practices.1 However, a significant portion Nestle, and Unilever, in united efforts to reduce carbon emissions.3

✩ The authors thank Editor-in-Chief Yasser Dessouky, the associate editor, and six anonymous reviewers for their constructive comments and suggestions. This
work was financially supported by the National Natural Science Foundation of China (Grants 72201137, 72371124 and 71901116) and the Qinglan Project of
the Jiangsu Higher Education Institutions of China.
∗ Corresponding author.
E-mail addresses: [email protected] (W. Niu), [email protected] (W. Xue), [email protected] (J. Xia), [email protected] (F. Lu).
1
https://www.cdp.net/en/articles/companies/smes-equipped-to-join-race-to-net-zero-with-dedicated-climate-disclosure-framework (accessed on March 30,
2024).
2
https://hbr.org/2022/04/how-big-businesses-can-help-their-suppliers-cut-emissions (accessed on March 30, 2024).
3
https://jdcorporateblog.com/jd-logistics-aims-to-reduce-50-carbon-emissions-by-2030 (accessed on March 30, 2024).

https://doi.org/10.1016/j.cie.2024.110573

Available online 18 September 2024

0360-8352/© 2024 Elsevier Ltd. All rights are reserved, including those for text and data mining, AI training, and similar technologies.
W. Niu et al. Computers & Industrial Engineering 197 (2024) 110573

chain member may suffer from investing in decarbonization, leading to

Yet, a buyer usually faces obstacles in assisting its supplier in supply a lower probability of supply chain decarbonization (Liu et al., 2022;
chain decarbonization. A primary drawback is that the upstream por- Tang & Yang, 2020).
tion accounts for the vast majority of supply chain emissions, whereas Increased awareness of CSR has driven firms to engage in supply
substantial decarbonization is often out of the buyer’s direct control.4 chain decarbonization, and environmental demands and pressure from
In reality, the buyer may face challenges in quantifying the carbon customers have further reshaped their incentives to do so. Those com-
emissions linked to the supplier’s production, assembly, and packaging prehensive factors jointly influence the buyer’s concern about whether
activities. Without additional benefits, the supplier rarely decarbonizes investing in the supplier to decarbonize its supply chain can simulta-
those carbon-intensive processes as this is a long-term activity involving neously achieve profitability and sustainability targets. The previous
large amounts of resources. To incentivize decarbonization, the buyer literature has examined the problem in various scenarios and has
has the option of investing in the supplier to encourage adopting provided valuable managerial insights; however, little attention has
greener production technologies, switching to cleaner energy sources, been paid to buyer–supplier contracting for decarbonization in a supply
or implementing carbon capture, utilization and storage (Fu et al., chain with private absorptive capacity and power structure. Moreover,
2023). This gives rise to another concern — how can the buyer ensure the impact of those driving forces on the incentive for decarbonization
that the supplier makes full use of its investment to abate carbon and on the profitability- and sustainability-related outcomes has not yet
emissions? It matters because the supplier might be unreliable in been fully understood. The purpose of this paper is to fill the gaps by
supply chain decarbonization or, alternatively, its absorptive capacity investigating the following research questions:
of utilizing the newly generated knowledge from the decarbonization (1) How can a buyer design contracts to incentivize an unreliable
investment is uncertain. According to the seminal study by Cohen and supplier to engage in supply chain decarbonization under asymmetric
Levinthal (1989), absorptive capacity gauges a firm’s proficiency in information?
identifying, assimilating, and leveraging knowledge from the environ- (2) How would the supplier’s absorptive capacity and bargaining
ment for commercial purposes; and a lower level of absorptive capacity power influence the buyer’s incentive to invest in decarbonization?
indicates that the firm is less efficient in leveraging such knowledge. (3) What are the effects of decarbonization contracts on firm prof-
On some occasions, the absorptive capacity of the supplier is so weak itability, consumer surplus, and the resulting carbon footprint?
that it barely reduces emissions, leaving the buyer with insufficient To address the issues above, we consider a dyadic supply chain in
revenues to offset the costs of investment. For example, a joint report by which a supplier provides production services to a buyer, who then pur-
Microsoft Corporation and the U.S. Environmental Protection Agency chases the final product and sells it to customers. To comply with CSR
emphasizes the need for buyers to address challenges, remove barriers, and enhance customer appeal, the buyer contemplates investing in the
and collaborate to collectively mitigate supply chain emissions by supplier to facilitate the decarbonization of the product. However, the
assisting suppliers in developing absorptive capacity.5 Nevertheless, the supplier is unreliable and possesses private information. Here, the term
Greenhouse Gas Protocol highlights that buyers often lack information ‘‘unreliable’’ implies uncertainty regarding the supplier’s absorptive
about supplier capacity associated with decarbonization; and suppliers capacity to assimilate and exploit the new decarbonization knowledge
are typically reluctant to disclose such information unless there are resulting from the buyer’s investment; and the term ‘‘private’’ denotes
extra profits.6 In this sense, the absorptive capacity privately held by the situation where information about the actual absorptive capacity is
the unreliable supplier will further undermine the buyer’s incentive to solely known to the supplier. Additionally, the supplier wields varying
invest, creating an obstacle to supply chain decarbonization. degrees of bargaining power over the buyer to determine the profit-
Another key driver of supply chain decarbonization is the power maximizing price, leading to distinct power structures within the supply
structure (Chen et al., 2017; Tang & Yang, 2020). In theory, the power chain. In such contexts, we develop models for buyer–supplier contracts
of a firm represents its ability to control the decision variables of where the absorptive capacity constitutes private information in the
another member within its supply chain (Yuan et al., 2021). Therefore, system and where one firm is more powerful than the other. We
the buyer’s attitude towards investing in supply chain decarbonization examine the equilibrium outcomes of these models, evaluate the effi-
varies depending on how much bargaining power it has relative to the cacy of contracting for decarbonization, and elucidate the ramifications
supplier. On the one hand, an empowered buyer has the potential to of crucial factors such as absorptive capacity, reliability levels, and
better ensure CSR compliance because it can get adequate profits to customers’ low-carbon preference, viewing them through the lens of
offset the cost of investment by claiming favorable retail margins. For the triple bottom line — profit, people, and the planet.
example, powerful retailers such as Walmart and Alibaba are expected Firstly, we find that if the absorptive capacity is lower than certain
to have environmental motivations, as they encourage suppliers to values, the buyer enforces a cut-off policy to avoid entering into a
reduce carbon emissions within their supply chains. On the other hand, contract with the supplier. Moreover, an increase in the supplier’s
when a buyer has less power than its supplier, it will find itself at a bargaining power or a decrease in the probability of an inefficient
disadvantage during negotiations. In such situations, profits from prod- supplier makes the implementation of this policy more likely. Secondly,
uct sales may not sufficiently cover the costs of investment, dampening the menu of contracts offered by the buyer not only incentivizes the
its incentive to invest in supply chain decarbonization (Gopalakrishnan
supplier to truthfully disclose his absorptive capacity but also has the
et al., 2021). While the power structure may be a hindrance to de-
potential to yield a mutually beneficial outcome for firms, customers,
carbonization, there is theoretical debate as to if increased bargaining
and the environment compared to the scenario without decarbonization
power of a supply chain firm can really enhance profitability (Shi et al.,
investment. When contracting occurs, the buyer experiences higher
2013). Thus, whether an empowered buyer is more willing to invest in
(lower) profits under asymmetric information than when contracting
decarbonization than when it becomes less powerful remains unclear.
with the inefficient (efficient) supplier under complete information.
For instance, it has been verified that in some cases a dominant supply
In addition to the reservation profit, the efficient supplier garners
additional profit from his informational advantage over the buyer.
4
Regrettably, customers and the environment suffer from information
https://environment.yale.edu/news/article/sustainable-procurement-
asymmetry due to reduced consumer surplus and an increased carbon
key-to-lowering-carbon-footprint (accessed on March 30, 2024).
5
https://www.epa.gov/climateleadership/working-suppliers-reduce- footprint. In addition, any firm can benefit from power under private
scope-3-emissions (accessed on March 30, 2024). absorptive capacity. Therefore, enhancing the buyer’s power increases
6
https://ghgprotocol.org/corporate-value-chain-scope-3-standard the likelihood of contracting for decarbonization and, most impor-
(accessed on March 30, 2024). tantly, improves consumer surplus and reduces the carbon footprint.

2
W. Niu et al. Computers & Industrial Engineering 197 (2024) 110573

Finally, our sensitivity analysis demonstrates that: (i) an increased ab- aspects. Firstly, they focus on the issue of decarbonization investment
sorptive capacity ratio bolsters buyer profitability, enhances consumer without asymmetric information, which is one of our primary concerns.
surplus, and facilitates a reduction in the carbon footprint. However, Secondly, they assume that the supplier can consistently utilize the
this may not be advantageous for the supplier as there are specific investment for decarbonization, while our model accounts for the
thresholds beyond which the information rent strictly decreases with stochastic nature of the supplier’s reliability, stemming from its uncer-
the absorptive capacity ratio. (ii) Increasing the probability of an tain absorptive capacity. Finally, none of them explore the interplay
inefficient supplier weakens (strengthens) buyer (supplier) profitability, between the power structure and decarbonization investment in such
enhances consumer surplus, and leads to a reduced carbon footprint. circumstances. In contrast, we develop models that incorporate varying
(iii) As customers become more environmentally conscious, both firm degrees of bargaining power between supply chain firms, shedding light
profitability and consumer surplus decrease, whereas this is beneficial on decarbonization investment in more general settings.
for the environment.
The rest of the paper is organized as follows. Section 2 reviews the 2.2. Contracting for decarbonization under information asymmetry
related literature. Section 3 shows the basic notations and assumptions
of our model. Section 4 develops buyer–supplier contracting models Another stream of literature addresses the issues of contracting
under different information and power structures, as well as the bench- for decarbonization under information asymmetry. Baliga and Maskin
mark model with no investment. Section 5 analyzes the equilibrium (2003) has early highlighted the importance of designing incentive and
outcomes to gain insights. Section 6 concludes and suggests several coordination mechanisms to tackle environmental issues in the pres-
directions for future research. All proofs are given in the appendix. ence of asymmetric information. In a supply chain setting, there exists
a range of emissions-related asymmetric information on both the supply
2. Related literature and demand sides, which significantly influences firms’ decarbonization
incentives and the resulting profitability and sustainability outcomes.
This paper is closely related to three streams of literature, namely: A large body of literature has examined this issue under various infor-
(i) sustainable investments in a supply chain; (ii) contracting for de- mation frameworks, such as asymmetric abatement cost (D’Amato &
carbonization under information asymmetry; and (iii) impact of power Dijkstra, 2015; Gopalakrishnan et al., 2021; He et al., 2024), production
structure within a supply chain. Next, we will review them in turn and cost (Raj et al., 2021), asymmetric green-marketing efforts (He et al.,
emphasize our main contributions. 2024; Xia & Niu, 2021), asymmetric market demand (Cai et al., 2023;
Zheng et al., 2022), and information sharing within a sustainable
2.1. Sustainable investments in a supply chain supply chain (Mehrjerdi & Shafiee, 2021).
Essentially, those papers focus on the design of incentive and co-
With the increasing emphasis on CSR, the issue of sustainable in- ordination mechanisms to encourage firms to comply with CSR with-
vestments has garnered significant attention in the field of supply chain out compromising their interests. For instance, D’Amato and Dijkstra
management (Blanco, 2022; Caro et al., 2013; Hong & Guo, 2019; Li (2015) study incentives for firms to invest in green technologies under
et al., 2020). Generally, this body of literature focuses on the potential private abatement costs and fixed adoption costs. Mehrjerdi and Shafiee
for sustainable investments to enhance environmental performance of (2021) underscore the imperative of integrating sustainability and
a supply chain, and under what conditions firms can benefit from such resilience within a closed-loop supply chain, arguing that information
initiatives (Gopalakrishnan et al., 2021; Hafezi et al., 2023). Among sharing can bolster system resilience. Utilizing a supplier Stackelberg
extant studies, Bouchery et al. (2017) highlight that while carbon re- game, Raj et al. (2021) establish models for a sustainable supply chain
ductions can be achieved by focusing on the operations of a single firm wherein the buyer’s production cost is private information. They iden-
within a supply chain, further reductions require collaborative efforts tify conditions under which the supplier benefits from making green
from all supply chain members. Along this vein, Hong and Guo (2019) efforts. Xia and Niu (2021) investigate how a manufacturer can design
examine cooperation in a supply chain, where the manufacturer and the contracts to ensure profitability and compliance with environmental
retailer invest in green production and green marketing, respectively. responsibilities when a retailer has private knowledge of its green-
They conclude that such cooperation can enhance the environmental marketing efforts and the true market size. Hosseini-Motlagh et al.
performance of the system. Furthermore, Gopalakrishnan et al. (2021) (2022) develop a dual-channel retailing model in which customers’
design a footprint-balanced scheme for reallocating carbon emissions sensitivities are contingent on pricing and the array of services offered
among supply chain firms, illustrating its potential to incentivize sup- by sales channels. A key finding is that the proposed contract can en-
pliers to make sustainable efforts that minimize the maximum deviation gender a win-win outcome. Zheng et al. (2022) explore the adoption of
from socially optimal pollution levels. A recent empirical study by Song green technologies by a manufacturer under different subsidy policies
et al. (2023) proves that internal emissions reduction by firms may and asymmetric demand information. Furthermore, Cai et al. (2023)
lead to a leakage effect, resulting in increased supply chain emissions. study a green supply chain where a supplier sells green products to
Moreover, this leakage is not solely driven by the pollution haven consumers through a retailer with information acquisition capabilities
effect but is also linked to supply chain optimization and innovation, to obtain private demand information. He et al. (2024) examine a
which may yield long-term benefits. Hafezi et al. (2023) explore a low-carbon supply chain in the presence of carbon subsidies and infor-
scenario in which firms collaborate to develop green products and mation asymmetry, where the manufacturer and retailer possess private
enhance supply chain sustainability, finding that an innovation-sharing information about their respective sustainability-related activities. They
strategy yields products with the highest environmental quality. Li, demonstrate that the manufacturer will truthfully disclose its private
Zhang, and Xu (2024) explore the influence of supply chain firms’ information; however, the retailer has an incentive to misrepresent such
collaboration on sustainable investments within the framework of en- information, a tendency influenced significantly by the coefficient and
vironmental regulations. In a similar vein, Guo et al. (2024) propose allocation ratio of carbon subsidies.
a game-theoretic model involving the government, manufacturers, and The aforementioned papers offer important insights into model-
consumers to analyze the interplay between environmental regulations ing decarbonization in the context of information asymmetry. Our
and sustainable investments. study builds upon and extends this body of literature by exploring the
The papers reviewed thus far provide a solid foundation for the challenge of supply chain decarbonization when the buyer faces an
study of investment in supply chain decarbonization, emphasizing the unreliable supplier with varying degrees of bargaining power. Conse-
importance of collaborative efforts among firms to reduce carbon emis- quently, our model uniquely incorporates private absorptive capacity
sions. Our study distinguishes itself from those papers in three key rather than relying on private production cost or demand information.

3
W. Niu et al. Computers & Industrial Engineering 197 (2024) 110573

This enables us to delve into the nuanced relationship between sup- reliability. In reality, however, suppliers may vary in their abili-
ply chain decarbonization and different types of private information. ties to utilize these investments due to differences in absorptive
Additionally, we investigate how the power structure affects firms’ capacity. Our model incorporates this essential aspect and high-
incentives for decarbonization from a triple bottom line approach. lights its significant influence on firms’ motivations for supply
chain decarbonization, which has not been discussed in extant
2.3. Impact of power structure within a supply chain papers.
• We integrate the concept of private absorptive capacity into the buyer–
Several papers have integrated the supply chain power structure supplier contracting model, shedding light on its impact on supply
into firms’ sustainable operations models to assess its influence on chain decarbonization. Existing studies have predominantly fo-
profitability and sustainability. For instance, Chen et al. (2017) discuss cused on asymmetric information related to abatement costs,
the role of bargaining power and coordination within a green supply green-market initiatives, or market demand, with limited discus-
chain, designing contracts encompassing price and green technology sion on how a supplier’s private absorptive capacity influences
investment decisions. Their findings demonstrate potential Pareto im- a buyer’s incentive for decarbonization. By incorporating this
provements. Yang and Chen (2018) evaluate the efficacy of revenue- additional form of private information commonly encountered
sharing and cost-sharing schemes offered by a dominant retailer in in emission reduction practices across various industries, we ex-
stimulating manufacturer investment in carbon abatement and enhanc- tend and enhance current research. Therefore, this approach not
ing firm profitability. Zhang et al. (2019) explore optimal low-carbon only deepens our comprehension of a key driver of supply chain
strategies within a manufacturer-retailer supply chain under varying decarbonization but also enhances the body of knowledge on
power structures and carbon regulations, revealing that power imbal- asymmetric information in supply chain management.
ances can diminish carbon emissions. Similarly, Tang and Yang (2020) • We elucidate how the power structure shapes incentives for decar-
analyze the impact of power structure on the optimal financing strategy bonization, firm profitability, consumer surplus, and carbon footprint
of a capital-constrained manufacturer, equilibrium carbon emissions, across various information frameworks. Given the unequal bargain-
and supply chain firms’ profits. They establish conditions favoring a ing power often present within supply chains, firms’ motivations
retailer-led game for carbon reduction and profit enhancement. Niu, for participating in emission reduction efforts can be signifi-
Shen, and Zhang (2022) investigate whether a manufacturer invests in cantly impacted. Thus, we incorporate the power structure into
uncertain decarbonization innovation based on its bargaining power our model alongside supplier reliability. By developing models
relative to a retailer in a supply chain. Liu et al. (2022) consider a that encompass these essential elements and examining the equi-
three-tier supply chain led by a tier-0 buyer to examine the optimal librium outcomes under different information frameworks, we
funding strategies under different power structures and their effects on provide insights into the effect of bargaining power from a triple
CSR management. More recently, an empirical study by Li, Xue, et al. bottom line perspective.
(2024) demonstrates that digital finance can markedly enhance firms’
bargaining power and green innovation, thereby improving firm per- 3. Model preliminaries
formance within supply chains. Mei et al. (2024) develop a model that
incorporates sustainable investments and concerns about manufacturer We consider a dyadic supply chain consisting of a supplier (he,
fairness within a supply chain where the retailer possesses or lacks denoted as ‘‘𝑆’’) and a buyer (she, denoted as ‘‘𝐵’’). The supplier
countervailing power. An important implication from their analysis provides production services to the buyer, who then purchases the
is that no bargaining agreement can be reached under advantageous final product at a wholesale price 𝑤 and sells it to end customers at
fairness concerns. Modak et al. (2024) study consumer environmental a retail price 𝑝. Thus, the retail margins of the buyer is denoted as
awareness and quality focus within a sustainable supply chain involving 𝑚 = 𝑝 − 𝑤. In accordance with previous studies (Gao & Souza, 2022;
a manufacturer and a retailer. They argue that any firm can derive Hafezi et al., 2023; Hong & Guo, 2019), we examine a market with
benefits from enhanced bargaining power. environmental considerations on both the supply and demand sides of
Compared to this stream of literature, our study places emphasis the supply chain. On the demand side, consumers are price-sensitive
on the significance of bargaining power within a sustainable supply and eco-conscious in that they make purchasing decisions based on the
chain that involves an unreliable supplier. Specifically, we aim to retail price and the carbon level of the final product. Here, the carbon
clarify the impact of different power structures on profitability and level quantifies the average amount of carbon emissions per unit of
sustainability outcomes under various information frameworks. More- final product associated with the supplier’s production, assembly, and
over, we evaluate the effectiveness of private information in promoting packaging activities.
decarbonization, and how it affects firm profitability, consumer surplus, To comply with CSR and stimulate customer purchases, the buyer
and carbon footprint, depending on the buyer’s relative power to is considering investing in the supplier to decarbonize the product. In
the unreliable supplier. This multi-faceted approach to understanding line with Poyago-Theotoky (2007), we assume that by providing a level
power structures can provide a more comprehensive understanding of of decarbonization investment denoted as 𝑥, the buyer can help the
the topic. supplier reduce the carbon level from 𝑧 to 𝑧̂ = 𝑧 − 𝑘𝑥, where 𝑧 is the
initial carbon level, quantifying the average carbon emissions per unit
2.4. Research gaps and our contributions of product under no investment, 𝑥 represents the buyer’s investment
level, and 𝑘 signifies the supplier’s absorptive capacity. Absorptive
This study stands out from previous literature by incorporating capacity, as delineated in the seminal study by Cohen and Levinthal
private absorptive capacity and power structure into the buyer–supplier (1989), measures a firm’s proficiency in identifying, assimilating, and
contracting model. In such contexts, we assess the impact of decar- leveraging external knowledge. Consequently, the parameter 𝑘 in our
bonization contracts on both profitability and sustainability outcomes. model denotes the proportion of new knowledge generated by the
More precisely, our main contributions encompass three key aspects: buyer’s investment that the supplier can effectively assimilate and uti-
lize for decarbonization purposes. Lower values of 𝑘 indicate a weaker
• We study decarbonization within a supply chain where the supplier’s absorptive capacity, suggesting the supplier’s decreased efficiency in
reliability in utilizing the buyer’s investment is uncertain. Previous leveraging decarbonization knowledge. The supplier’s reliability in de-
research typically postulates that firms can consistently leverage carbonizing the product is uncertain because his absorptive capacity
decarbonization-related investments to reduce supply chain emis- could be low (𝐿) or high (𝐻). Furthermore, the true absorptive capacity
sions, without considering the stochastic nature of the supplier’s is privately known to the supplier whereas the buyer holds only a prior

4
W. Niu et al. Computers & Industrial Engineering 197 (2024) 110573

belief about its distribution. We follow previous research (Nikoofal & and the profit of the type-𝑖 supplier
Gümüş, 2018) to assume that with probability 0 ≤ 𝜃 ≤ 1, the absorptive
𝛱𝑆 = (𝑤 − 𝑐)𝑞
̂ + 𝑡𝑖 , for 𝑖 = {𝐿, 𝐻}. (2)
capacity is low (𝑘 = 𝑘𝐿 ), indicating the supplier’s inefficiency in
product decarbonization; with probability 1−𝜃, the absorptive capacity Given that, on average, the supplier emits an amount of carbon
is high (𝑘 = 𝑘𝐻 ). To simplify notation, we let 𝑘𝐿 = 𝛾𝑘𝐻 and 𝑘𝐻 = 100%, emissions 𝑧̂ into the environment during the production process of each
where 0 ≤ 𝛾 < 1 represents the absorptive capacity ratio. That is, the decarbonized product, we follow extant studies (see Poyago-Theotoky
type-H supplier can make full use of the newly generated decarboniza- (2007) and the references therein) to write the resulting carbon foot-
tion knowledge, whereas the type-L supplier can only partially utilize print as a result of 𝑞 volume of output as 𝐶𝐹 = 𝑧𝑞.
̂ Put differently, the
it. Lower values of 𝛾 indicate a greater disparity in absorptive capacities supplier can reduce his carbon footprint by an amount of 𝑞(𝑧 − 𝑧)̂ due
between the two types of suppliers, with the type-L supplier being less to product decarbonization. The consumer surplus function gives
effective in utilizing knowledge for product decarbonization. 𝑞
𝑞2
By the revelation principle (Myerson, 1979), the buyer is required 𝐶𝑆 = (𝑎 − 𝜐 − 𝑏𝑧)d𝜐
̂ − 𝑞(𝑎 − 𝑞 − 𝑏𝑧)
̂ = . (3)
∫0 2
to design a menu of contracts for the supplier to encourage truthful dis-
closure of private information. In our model, the supplier’s absorptive The decision to invest in decarbonization is a long-term strategic
capacity follows a two-point distribution and therefore, it is sufficient commitment, unlike the more fluid short-term tactical decisions such
for the buyer to offer two alternatives (𝑥𝐿 , 𝑡𝐿 ) and (𝑥𝐻 , 𝑡𝐻 ), where as production and pricing strategies (Fan et al., 2023). As such, we
𝑡𝑖 (𝑖 = 𝐻, 𝐿) represents the lump-sum transfer payment. The parameter postulate that the design and contracting stages precede the pricing
𝑡𝑖 is left unspecified because both positive and negative values carry stage. However, the relative bargaining power between the two firms
economic significance. For example, if 𝑡𝑖 is greater than zero, the potentially influences their pricing decisions. To elucidate the impact of
transfer payment from the buyer allows the supplier to procure equip- power structure on the buyer’s investment incentives, profitability, and
ment and upgrade production lines in preparation for decarbonization. sustainability, we examine scenarios where each party acts as the game
Conversely, if 𝑡𝑖 is less than zero, it reflects the scenario where the leader determining the profit-maximizing price ahead of the other. The
supplier compensates the buyer for investing in supply chain decar- sequence of events in these scenarios is illustrated in Fig. 1 and further
bonization. The buyer’s primary concern is how to appropriately adjust elaborated below:
the investment level and the transfer payment to engage the supplier in • Supplier-led game: Firstly, during the design stage, the buyer
decarbonization activities while securing profitability. As a result, each presents the supplier with a menu of decarbonization contracts
alternative in the menu comprises both decarbonization and monetary {(𝑥𝐿 , 𝑡𝐿 ); (𝑥𝐻 , 𝑡𝐻 )}, which is of the take-it-or-leave-it nature. Sec-
incentives, thereby forming the two-part tariff contract that is widely ondly, during the contracting stage, the supplier decides whether
used in the sustainable operations literature (Hong & Guo, 2019; Niu, to accept the contracts and, if so, selects the one intended for his
Xia, & Shen, 2022). true type. Otherwise, the contracts become invalid, resulting in
Assuming without loss of generality that the buyer’s cost of provid- the supplier receiving his reservation profit 𝛱𝑆0 . Thirdly, during
ing an investment level 𝑥 is denoted as 𝜙𝑥2 ∕2, where 𝜙 > 0 signifies the pricing stage, the supplier sets the wholesale price for the
the investment efficiency. Higher values of 𝜙 mean lower efficiency buyer, who then determines the retail margins.8 Finally, the
in decarbonization investment, as the buyer must incur a greater in- demand, profitability, and sustainability outcomes are realized.
vestment cost to assist the supplier in reducing the carbon level to • Buyer-led game: The design and contracting stages are the same
certain values. The quadratic form captures the law of diminishing as in the supplier-led game, except that the buyer specifies her
returns to investment expenditures — an approach commonly seen retail margins before the supplier determines the wholesale price
in the literature on sustainable operations and is also validated by during the pricing stage. Subsequently, the demand is realized,
empirical studies (Fan et al., 2023; Raj et al., 2021). When investment and the profitability and sustainability outcomes are achieved.
happens, the (marginal) production cost of the product becomes 𝑐̂ =
𝑐 + 𝜇(𝑧 − 𝑧),̂ where 𝑐 indicates the initial production cost of the Keeping in mind that in both games, we allow the buyer to de-
termine the retail margins instead of the retail price, with the aim
supplier in the absence of investment, which is normalized to zero for
of preventing the results from being influenced by different pricing
brevity. Furthermore, we posit that 𝜇 are some positive constants to
strategies that may arise from varying power structures. Table A.1
capture industry practices where decarbonized products entail more
summarizes all notations used in this paper.
costs compared to conventional ones due to the adoption of sustainable
raw materials, decarbonization of manufacturing processes, and/or
4. The model
installation of energy-efficient appliances.7
Consistent with the existing literature (Gao & Souza, 2022; Hafezi
A key feature of the menu of contracts is that the supplier, regardless
et al., 2023), the demand function is written as 𝑞 = 𝑎 − 𝑝 − 𝑏𝑧, ̂
of his type, at least obtains the reservation profit when engaging in
where 𝑎 is the potential market base, which is assumed to be large
decarbonization activities. In other words, the supplier’s reservation
enough to rule out naught cases, 0 < 𝑏 < 1 represents the degree
profit is the same as the optimal profit he would receive if he refuses
of customers’ low-carbon preference. Greater values of 𝑏 indicate that
to accept the contracts but continues to provide production services
customers attach more importance to the environmental impact of the
to the buyer. We begin by studying the case with no decarbonization
product when they make purchasing decisions. Note that as the buyer
investment, in which the buyer no longer undertakes any investment
raises the level of decarbonization investment 𝑥, the resulting carbon
cost and thus, the carbon level and the product cost remain unchanged
level will decrease linearly, while the associated investment cost will
(i.e., 𝑧̂ = 𝑧, 𝑐̂ = 𝑐). By applying Lemma 1 (as shown in the appendix), we
increase quadratically. Consequently, the buyer must strike a balance
can determine the equilibrium outcomes of the model under different
between enlarging demand and rising cost. The buyer’s expected profit
is formulated as
( ) ( )
1 1 8
Under both power structures, the buyer should base decisions on consis-
𝛱𝐵 = 𝜃 𝑚𝑞 − 𝑡𝐿 − 𝜙𝑥2𝐿 + (1 − 𝜃) 𝑚𝑞 − 𝑡𝐻 − 𝜙𝑥2𝐻 , (1)
2 2 tent price variables to prevent findings being influenced by disparate pricing
strategies. Given the buyer’s responsibility for profit-maximizing retail margins
when wielding greater bargaining power over the supplier, it is therefore
7
https://ecocation.org/why-sustainable-products-are-expensive (accessed assumed that she determines the retail margins, rather than the retail price,
on March 20, 2024). to ensure profitability in the supplier-led scenario.

5
W. Niu et al. Computers & Industrial Engineering 197 (2024) 110573

Fig. 1. Sequence of the game.

power structures. These outcomes are presented in the second and where the buyer sets the contractual parameters 𝑥𝑖 , 𝑡𝑖 to maximize her
third columns of Table A.2, where the superscript ‘‘(SN) BN’’ indi- profit of the objective function. Eq. (IR-SC) is the individual rationality
cates the setting with (supplier-) buyer-led outcomes in the absence of constraint, ensuring that the supplier will be better off if he receives the
decarbonization investment. investment for product decarbonization. By optimizing the problem and
In what follows, we will develop models based on whether the incorporating the optimal contractual configurations 𝑥𝑆𝐶 𝑆𝐶 into the
𝑖 , 𝑡𝑖
supplier has private information and whether the buyer has a prior best responses, some simplifications lead to the equilibrium outcomes
claim to the retail margins. of the model under supplier-led and complete information.

4.1. Contracting for decarbonization under complete information 4.1.2. The buyer-led setting
When the buyer is more powerful, she has a prior claim to the retail
margins during the pricing stage. The profit-maximizing problems are
In the context of complete information, the buyer provides the
maximize𝑚 𝛱𝐵 (𝑚; 𝑥𝑖 , 𝑡𝑖 | 𝑘𝑖 ) and maximize𝑤 𝛱𝑆 (𝑤; 𝑥𝑖 , 𝑡𝑖 | 𝑘𝑖 ). Similarly, we
type-𝑖 supplier with one set of contracts (𝑥𝑖 , 𝑡𝑖 ) based on the observed
apply backward induction and Lemma 1 to get the profit functions after
absorptive capacity 𝑘𝑖 , for 𝑖 = {𝐿, 𝐻}. The carbon level and the
the optimization of the pricing decisions, which are
production cost are 𝑧̂ = 𝑧 − 𝑘𝑖 𝑥𝑖 , 𝑐̂ = 𝜇𝑘𝑖 𝑥𝑖 , respectively. Under any
power structure, the profit functions of the supplier and the buyer are, 1
𝛱𝑆𝐵𝐶 (𝑥𝑖 , 𝑡𝑖 | 𝑘𝑖 ) = [𝑎 − 𝑏𝑧 + 𝑘𝑖 𝑥𝑖 (𝑏 − 𝜇)]2 + 𝑡𝑖 , and
respectively, written as 16
1 1
𝛱𝐵𝐵𝐶 (𝑥𝑖 , 𝑡𝑖 | 𝑘𝑖 ) = [𝑎 − 𝑏𝑧 + 𝑘𝑖 𝑥𝑖 (𝑏 − 𝜇)]2 − 𝜙𝑥2𝑖 − 𝑡𝑖 , (6)
𝛱𝑆 (𝑤; 𝑥𝑖 , 𝑡𝑖 | 𝑘𝑖 ) = (𝑤 − 𝜇𝑘𝑖 𝑥𝑖 )[𝑎 − 𝑤 − 𝑚 − 𝑏(𝑧 − 𝑘𝑖 𝑥𝑖 )] + 𝑡𝑖 , and 8 2
1 for the supplier and the buyer, respectively, where the superscript ‘‘BC’’
𝛱𝐵 (𝑚; 𝑥𝑖 , 𝑡𝑖 | 𝑘𝑖 ) = 𝑚[𝑎 − 𝑤 − 𝑚 − 𝑏(𝑧 − 𝑘𝑖 𝑥𝑖 )] − 𝑡𝑖 − 𝜙𝑥2𝑖 . (4)
2 represents the setting with buyer-led under complete information.
During the contracting stage, the supplier engages in decarboniza-
4.1.1. The supplier-led setting tion only if the resulting profit 𝛱𝑆𝐵𝐶 (𝑥𝑖 , 𝑡𝑖 | 𝑘𝑖 ) exceeds the reservation
When the supplier is more powerful, he sets the wholesale price profit 𝛱𝑆0 , which equals 𝛱𝑆𝐵𝑁 under buyer-led and no investment.
and the buyer subsequently determines the retail margins to maximize According to Eq. (6), the buyer’s problem (PBC) during the design stage
their respective profits during the pricing stage, which from Eq. (4) are
written as maximize𝑤 𝛱𝑆 (𝑤; 𝑥𝑖 , 𝑡𝑖 | 𝑘𝑖 ), maximize𝑚 𝛱𝐵 (𝑚; 𝑥𝑖 , 𝑡𝑖 | 𝑘𝑖 ). Using maximize 𝛱𝐵𝐵𝐶 (𝑥𝑖 , 𝑡𝑖 | 𝑘𝑖 )
(𝑥𝑖 ,𝑡𝑖 )
backward induction and replacing 𝑧̃ (𝑐) ̃ of Lemma 1 with 𝑧̂ (𝑐), ̂ we
subject to 𝛱𝑆𝐵𝐶 (𝑥𝑖 , 𝑡𝑖 | 𝑘𝑖 ) ≥ 𝛱𝑆𝐵𝑁 , (IR-BC)
derive the two firms’ optimal decisions, profitability, and sustainability
outcomes as functions of 𝑥𝑖 , 𝑡𝑖 . The profit functions of the supplier and Performing the optimization and inserting the optimal contractual con-
the buyer are, respectively, shown as figurations 𝑥𝐵𝐶 𝐵𝐶 in the best responses above, some algebraic calcu-
𝑖 , 𝑡𝑖
1 lations yield the equilibrium outcomes of the current model.
𝛱𝑆𝑆𝐶 (𝑥𝑖 , 𝑡𝑖 | 𝑘𝑖 ) = [𝑎 − 𝑏𝑧 + 𝑘𝑖 𝑥𝑖 (𝑏 − 𝜇)]2 + 𝑡𝑖 , and
8 The equilibrium outcomes of the contracting models with decar-
1 1 bonization investment under complete information are summarized in
𝛱𝐵𝑆𝐶 (𝑥𝑖 , 𝑡𝑖 | 𝑘𝑖 ) = [𝑎 − 𝑏𝑧 + 𝑘𝑖 𝑥𝑖 (𝑏 − 𝜇)]2 − 𝜙𝑥2𝑖 − 𝑡𝑖 , (5)
16 2 the fourth and fifth columns of Table A.2.
where the superscript ‘‘SC’’ represents the setting with supplier-led
under complete information. 4.2. Contracting for decarbonization under asymmetric information
During the contracting stage, the supplier accepts the contracts as
long as his profit 𝛱𝑆𝑆𝐶 (𝑥𝑖 , 𝑡𝑖 ; 𝑘𝑖 ) is not less than the reservation profit Now we investigate the scenario in which the two firms engage
𝛱𝑆0 which, as mentioned earlier, amounts to 𝛱𝑆𝑆𝑁 under supplier-led in supply chain decarbonization under asymmetric information. In
and no investment. By Eq. (5), the buyer’s problem (PSC) during the this context, the buyer’s purposes of designing contracts are to: (i)
design stage is encourage the unreliable supplier to receive the decarbonization invest-
ment; and (ii) induce the supplier to truthfully disclose his absorptive
maximize 𝛱𝐵𝑆𝐶 (𝑥𝑖 , 𝑡𝑖 | 𝑘𝑖 ) capacity, thereby avoiding any discrepancies between the true capacity
(𝑥𝑖 ,𝑡𝑖 )
and the intended contract. These objectives can be accomplished by
subject to 𝛱𝑆𝑆𝐶 (𝑥𝑖 , 𝑡𝑖 | 𝑘𝑖 ) ≥ 𝛱𝑆𝑆𝑁 , (IR-SC) offering the supplier a menu of contracts. Essentially, this approach

6
W. Niu et al. Computers & Industrial Engineering 197 (2024) 110573

allows the buyer to incorporate both the individual rationality and 𝛱𝑆𝐵𝐴 (𝑥𝑖 , 𝑡𝑖 | 𝑘𝑖 ), which is identical to that in Eq. (6). Moreover, the
incentive compatibility constraints into the contract menu during the expected profit of the buyer
design phase. The former guarantees that the supplier, upon engaging [ ]
1 1
in product decarbonization, earns at least the reservation profit; the 𝛱𝐵𝐵𝐴 (𝑥𝐿 , 𝑡𝐿 , 𝑥𝐻 , 𝑡𝐻 | 𝑘𝐿 , 𝑘𝐻 ) = 𝜃 (𝑎 − 𝑏𝑧 + 𝑘𝐿 𝑥𝐿 (𝑏 − 𝜇))2 − 𝜙𝑥2𝐿 − 𝑡𝐿
8 2
[ ]
latter ensures that the supplier is worse off if he misrepresents his 1 1
+ (1 − 𝜃) (𝑎 − 𝑏𝑧 + 𝑘𝐻 𝑥𝐻 (𝑏 − 𝜇))2 − 𝜙𝑥2𝐻 − 𝑡𝐻 ,
absorptive capacity compared to when accurately selecting a contract 8 2
from the menu. where the superscript ‘‘BA’’ represents the case with buyer-led under
Under asymmetric information, the realized carbon level and the asymmetric information.
product cost hinge on the supplier’s true absorptive capacity. In partic- The buyer’s profit-maximizing problem (PBA) during the design
ular, with probability 𝜃, the supplier is of the low type, and the carbon stage
level and the production cost are 𝑧̂ = 𝑧 − 𝑘𝐿 𝑥𝐿 , 𝑐̂ = 𝜇𝑘𝐿 𝑥𝐿 , respectively;
maximize 𝛱𝐵𝐵𝐴 (𝑥𝐿 , 𝑡𝐿 , 𝑥𝐻 , 𝑡𝐻 | 𝑘𝐿 , 𝑘𝐻 )
with probability (1 − 𝜃), he is of the high type and therefore, 𝑧̂ = {(𝑥𝐿 ,𝑡𝐿 );(𝑥𝐻 ,𝑡𝐻 )}
𝑧 − 𝑘𝐻 𝑥𝐻 , 𝑐̂ = 𝜇𝑘𝐻 𝑥𝐻 . In recognizing this, the buyer designs a subject to 𝛱𝑆𝐵𝐴 (𝑥𝐻 , 𝑡𝐻 | 𝑘𝐻 ) ≥ 𝛱𝑆𝐵𝐴 (𝑥𝐿 , 𝑡𝐿 | 𝑘𝐻 ), (ICH-BA)
menu of contracts {(𝑥𝐿 , 𝑡𝐿 ); (𝑥𝐻 , 𝑡𝐻 )} to pursue the maximization of
her expected profit. At the beginning of the pricing stage, given the 𝛱𝑆𝐵𝐴 (𝑥𝐿 , 𝑡𝐿 | 𝑘𝐿 ) ≥ 𝛱𝑆𝐵𝐴 (𝑥𝐻 , 𝑡𝐻 | 𝑘𝐿 ), (ICL-BA)
supplier’s absorptive capacity 𝑘𝑖 (𝑖 = 𝐿, 𝐻), the profit functions for the 𝛱𝑆𝐵𝐴 (𝑥𝐻 , 𝑡𝐻 | 𝑘𝐻 ) ≥ 𝛱𝑆𝐵𝑁 , (IRH-BA)
two firms can be found in Eq. (4).
𝛱𝑆𝐵𝐴 (𝑥𝐿 , 𝑡𝐿 | 𝑘𝐿 ) ≥ 𝛱𝑆𝐵𝑁 , (IRL-BA)
4.2.1. The supplier-led setting where Eqs. (ICH-BA) and (ICL-BA) represent the incentive compatibil-
When the supplier has private information and holds more bargain- ity constraints under buyer-led, Eqs. (IRH-BA) and (IRL-BA) are the
ing power than the buyer, we can optimize Eq. (4) using backward individual rationality constraints. The buyer determines 𝑥𝐿 , 𝑡𝐿 , 𝑥𝐻 and
induction and subsequently employ Lemma 1 to determine the firms’ 𝑡𝐻 to maximize her expected profit of the objective function. Solving
optimal decisions, profitability, and sustainability outcomes which are the problem and substituting the optimal contractual configurations
as functions of the contractual parameters. Specifically, the profit func- 𝑥𝐵𝐴
𝐿
, 𝑡𝐵𝐴
𝐿
, 𝑥𝐵𝐴
𝐻
and 𝑡𝐵𝐴
𝐻
to the best responses above, some algebraic
tion of the type-𝑖 supplier, denoted as 𝛱𝑆𝑆𝐴 (𝑥𝑖 , 𝑡𝑖 | 𝑘𝑖 ), is the same as that calculations give the equilibrium outcomes of the current model.
in Eq. (5). The expected profit of the buyer The equilibrium outcomes of the models with decarbonization in-
[ ] vestment under asymmetric information are presented in the sixth and
1 1
𝛱𝐵𝑆𝐴 (𝑥𝐿 , 𝑡𝐿 , 𝑥𝐻 , 𝑡𝐻 | 𝑘𝐿 , 𝑘𝐻 ) = 𝜃 (𝑎 − 𝑏𝑧 + 𝑘𝐿 𝑥𝐿 (𝑏 − 𝜇))2 − 𝜙𝑥2𝐿 − 𝑡𝐿
16 2 seventh columns of Table A.2.
[ ]
1 1
+ (1 − 𝜃) (𝑎 − 𝑏𝑧 + 𝑘𝐻 𝑥𝐻 (𝑏 − 𝜇))2 − 𝜙𝑥2𝐻 − 𝑡𝐻 , (7)
16 2 5. Results analysis
where the superscript ‘‘SA’’ represents the case with supplier-led and
asymmetric information. This section analyzes the equilibrium outcomes of the models in
During the contracting stage, the type-𝑖 supplier accepts the invest- various settings, aiming to examine the effectiveness of decarbonization
ment from the buyer to decarbonize the product only when his profit contracts offered by the buyer to the unreliable supplier in terms of
𝛱𝑆𝑆𝐴 (𝑥𝑖 , 𝑡𝑖 | 𝑘𝑖 ) is not less than that under no investment (i.e., 𝛱𝑆𝑆𝑁 ). their impact on firm profitability, consumer surplus, and the resulting
During the design stage, the problem (PSA) is formulated as maximizing carbon footprint. Subsequently, we will conduct sensitivity analysis to
the buyer’s profit of Eq. (7) subject to the individual rationality and elucidate the effects of key model factors from a triple bottom line
incentive compatibility constraints, as follows perspective.

maximize 𝛱𝐵𝑆𝐴 (𝑥𝐿 , 𝑡𝐿 , 𝑥𝐻 , 𝑡𝐻 | 𝑘𝐿 , 𝑘𝐻 ) 5.1. Cut-off policy on contracting for supply chain decarbonization
{(𝑥𝐿 ,𝑡𝐿 );(𝑥𝐻 ,𝑡𝐻 )}

subject to 𝛱𝑆𝑆𝐴 (𝑥𝐻 , 𝑡𝐻 | 𝑘𝐻 ) ≥ 𝛱𝑆𝑆𝐴 (𝑥𝐿 , 𝑡𝐿 | 𝑘𝐻 ), (ICH-SA) To begin with, we show that under certain conditions the two firms
𝛱𝑆𝑆𝐴 (𝑥𝐿 , 𝑡𝐿 | 𝑘𝐿 ) ≥ 𝛱𝑆𝑆𝐴 (𝑥𝐻 , 𝑡𝐻 | 𝑘𝐿 ), (ICL-SA) may not sign contracts to decarbonize the supply chain, as summarized
in the following theorem.
𝛱𝑆𝑆𝐴 (𝑥𝐻 , 𝑡𝐻 | 𝑘𝐻 ) ≥ 𝛱𝑆𝑆𝑁 , (IRH-SA)
𝛱𝑆𝑆𝐴 (𝑥𝐿 , 𝑡𝐿 | 𝑘𝐿 ) ≥ 𝛱𝑆𝑆𝑁 , (IRL-SA) Theorem 1. For all 0 ≤ 𝛾 ≤ 1, when the supplier (buyer) is more
powerful, there exists a threshold 𝛾 𝑆𝐴(𝐵𝐴) such that the firms contract out
where Eqs. (ICH-SA) and (ICL-SA) represent the incentive compatibility of supply chain decarbonization if 𝛾 ≤ 𝛾 𝑆𝐴(𝐵𝐴) , where 𝛾 𝑆𝐴 = 1 − 1+2∕𝜃3
,
constraints under supplier-led, ensuring that each type of supplier has 3
no incentive to pick the contract incorrectly. Eqs. (IRH-SA) and (IRL- 𝛾 𝐵𝐴 = 1 − 2+1∕𝜃
.
SA) serve as individual rationality constraints, allowing either type of Theorem 1 shows that there exist specific thresholds linked to the
supplier to obtain a profit that is not less than when he refuses to absorptive capacity ratio above which the two firms opt to decarbonize
accept the decarbonization investment. Performing the optimization the supply chain, while below them they will not. In essence, the buyer
and substituting the optimal contractual configurations 𝑥𝑆𝐴𝐿
, 𝑡𝑆𝐴
𝐿
, 𝑥𝑆𝐴
𝐻
, will only invest in the type-L supplier if his absorptive capacity is suffi-
and 𝑡𝑆𝐴
𝐻
into the best responses above, we get the equilibrium outcomes ciently strong. The intuition is that, by the definition, a weak absorptive
of the model under supplier-led and asymmetric information. capacity implies that the supplier cannot effectively utilize newly gen-
erated decarbonization knowledge, resulting in a minimal reduction
4.2.2. The buyer-led setting in the carbon level. This, in turn, diminishes the product’s appeal
In situations where the buyer has more bargaining power and the to customers and dissuades the buyer from offering decarbonization
supplier holds private information, we can first optimize 𝛱𝑆 (𝑤; 𝑥𝑖 , contracts.
𝑡𝑖 | 𝑘𝑖 ) of Eq. (4) to obtain the type-𝑖 supplier’s optimal wholesale price Extant papers have extensively investigated supply chain decar-
as a function of the retail margins. Then, we insert it in the buyer’s bonization within the framework of information asymmetry, yielding
profit function of Eq. (4) and maximize 𝛱𝐵 (𝑚; 𝑥𝑖 , 𝑡𝑖 | 𝑘𝑖 ) to derive the valuable insights (see, e.g., Raj et al. (2021) and Cai et al. (2023)).
optimal retail margins as functions of the contractual parameters 𝑥𝑖 , However, scant attention has been paid to scenarios where supply chain
𝑡𝑖 , for 𝑖 = {𝐿, 𝐻}. Given the realized carbon level 𝑧̂ and production firms implement cut-off policies to strike a balance between profitabil-
cost 𝑐, ̂ utilizing Lemma 1 leads to the profit of the type-𝑖 supplier ity and sustainability. Moreover, previous studies have predominantly

7
W. Niu et al. Computers & Industrial Engineering 197 (2024) 110573

respond positively to the news of a higher probability of such a supplier

appearing. Consequently, as 𝜃 increases, the likelihood of implementing
the cut-off policy for decarbonization decreases. It is important to note
that the cut-off points are influenced by the probability of an inefficient
supplier and are independent of other factors in the model, such as
the supplier’s production cost, the buyer’s investment efficiency, or the
degree of customers’ low-carbon preference. Thus, we conclude that the
absorptive capacity ratio plays a crucial role in the cut-off policy, and
the probability of an inefficient supplier has a moderating effect on the
implementation of this policy.

5.2. Analysis of the optimal decisions

For ease of exposition, we perform two-party comparisons of the

firms’ optimal decisions, including the optimal contract configurations,
Fig. 2. Comparisons between 𝛾 thresholds. optimal prices and demand. Comparisons of those decisions between
different information structures lead to the following theorem.

focused on asymmetric information related to factors such as abatement Theorem 2. When the supplier and the buyer sign contracts for supplier
cost (Gopalakrishnan et al., 2021), production cost (Raj et al., 2021), chain decarbonization:
green-marketing efforts (Xia & Niu, 2021), and market demand Cai (i) 𝑥𝑗𝐴
𝐻
= 𝑥𝑗𝐶
𝐻
, 𝑥𝑗𝐴
𝐿
≤ 𝑥𝑗𝐶𝐿
, 𝑡𝑗𝐴 𝑗𝐶
𝑖 ≥ 𝑡𝑖 ;
𝑗𝐴 𝑗𝐶
et al. (2023). In contrast to the existing research, we reveal that the (ii) 𝑤 𝑗𝑁 ≤ 𝑤𝐻 = 𝑤𝐻 , 𝑤 𝑗𝑁 ≤ 𝑤𝑗𝐴 𝐿
≤ 𝑤𝑗𝐶𝐿
; 𝑚𝑗𝑁 ≤ 𝑚𝑗𝐴𝐻
= 𝑚𝑗𝐶 𝐻
,
absorptive capacity of the unreliable supplier critically influences the 𝑗𝑁 𝑗𝐴 𝑗𝐶
𝑚 ≤ 𝑚𝐿 ≤ 𝑚𝐿 ; and
buyer’s investment incentives. Most importantly, we establish condi- (iii) 𝑞 𝑗𝑁 ≤ 𝑞𝐻𝑗𝐴 𝑗𝐶
= 𝑞𝐻 , 𝑞 𝑗𝑁 ≤ 𝑞𝐿𝑗𝐴 ≤ 𝑞𝐿𝑗𝐶 , for 𝑖 = {𝐻, 𝐿}; 𝑗 = {𝑆, 𝐵}.
tions under which it is advisable for the buyer to avoid engaging with
the inefficient supplier for supply chain decarbonization. This echoes Part (i) of Theorem 2 demonstrates that under asymmetric informa-
the argument by Ha (2001) that, in some cases, cooperation between tion, the buyer provides the type-H supplier with the same investment
supply chain firms breaks down because a cut-off policy is necessary level as under complete information, whereas invests less in the type-L
to prevent the agent from signing any contract. Therefore, the cut- supplier. In other words, the existence of private absorptive capacity
off policy articulated in Theorem 1 addresses concerns about whether weakly reduces the buyer’s incentive to decarbonize the supply chain.
supply chain firms should adhere to CSR principles while maximizing However, the optimal transfer payment for each type of supplier under
profits. In the subsequent analysis, we will demonstrate the mutual asymmetric information is higher than under complete information.
benefits of this policy for both parties. This is perhaps the buyer is not sure how much of the investment
Analysis of the cut-off points of Theorem 1 yields the following is likely to be assimilated and exploited by the supplier for product
corollary. decarbonization, making the return on investment may not yield as
much as expected. In response, the buyer decreases the investment level
𝑑𝛾 𝑆𝐴
Corollary 1. For all 0 ≤ 𝜃 ≤ 1: (i) 𝛾 𝑆𝐴 ≥ 𝛾 𝐵𝐴 ; and (ii) 𝑑𝜃
< 0, and increases the transfer payment to ensure profitability, and this is
𝑑𝛾 𝐵𝐴 irrelevant to the power structure.
𝑑𝜃
< 0.
The implications of parts (ii) and (iii) of Theorem 2 are twofold.
The findings in Corollary 1 are depicted in Fig. 2. The first part of The optimal prices and demand under decarbonization investment are
the corollary gives the answer to the question of how would the power larger than those under no investment. The rationale for this finding
structure shape the incentive for the buyer to offer decarbonization is as follows. Customers are sensitive to both the retail price and
contracts to the unreliable supplier. When the supplier becomes more carbon level of the final product; the decarbonization investment helps
powerful, the probability that the buyer will invest in decarbonization reduce the carbon level, thereby making the final product more envi-
lowers since the cut-off point is larger under supplier-led than under ronmentally friendly. Recognizing this, the two firms have incentives
buyer-led. In this regard, our findings establish a link between the to translate this reinforced non-price factor into higher prices without
pricing and design stages; namely, increasing the bargaining power experiencing significant loss of demand, as compared to the scenario
of the buyer during the pricing stage makes it more likely for the without decarbonization investment. Counterintuitively, higher prices
supplier to receive the decarbonization investment during the design are accompanied by more demand regardless of the information struc-
stage. The reason behind this is that the buyer can ensure profitability ture. The reason is that the negative effect of a higher price on demand
if she has a prior claim to the profit-maximizing price, allowing her to is offset by the positive effect of a lower carbon level. Additionally,
offset the investment cost and losses resulting from inefficient product the theorem reveals that if the buyer signs contracts with the type-H
decarbonization. supplier for decarbonization, then the optimal prices and demand under
One might have expected that the buyer would be less inclined asymmetric information are identical to those under complete infor-
to initiate decarbonization investment activities when she anticipates mation. Otherwise, the optimal prices and demand under asymmetric
a higher probability of an inefficient supplier. However, the second information will be lower than those under complete information.
part of Corollary 1 reveals that the opposite is true. Regardless of Put differently, the presence of private information motivates both
the power structure, higher 𝜃 values result in lower cut-off thresholds firms to lower their prices, thereby leading to a reduction in demand.
𝛾 𝑗𝐴 (𝑗 = 𝑆, 𝐵), above which supply chain decarbonization occurs (see This occurs because the buyer invests less in the type-L supplier and
Theorem 1). This is because, for a given absorptive capacity ratio, the therefore the product cannot be substantially decarbonized. While a
type-L supplier can still assimilate and leverage a portion of the newly reduction in the retail price may attract customers, a relatively higher
generated knowledge to decarbonize the product, although the reduc- carbon level finally deters them from making purchasing decisions.
tion in the carbon level may not be that significant. Decarbonization Comparisons of the firms’ optimal decisions between different
makes the product more appealing to customers, and the buyer will power structures yield the following theorem.

8
W. Niu et al. Computers & Industrial Engineering 197 (2024) 110573

Theorem 3. When the supplier and the buyer enter into a decarbonization These findings are illustrated in Figs. 3(a) and 3(b). Recall from
agreement: Theorem 1 that if the absorptive capacity ratio is lower than the cut-
(i) 𝑥𝑆𝐶
𝑖 = 𝑥𝐵𝐶 𝑆𝐴 𝐵𝐴 𝑆𝐴
𝑖 , 𝑥𝐻 = 𝑥𝐻 , 𝑥𝐿 ≤ 𝑥𝐿 ; 𝑡𝑖
𝐵𝐴 𝑆𝐶 ≤ 𝑡𝐵𝐶 , 𝑡𝑆𝐴 ≤ 𝑡𝐵𝐴 , and
𝑖 𝐻 𝐻
off points, the firms merely get their respective profits, which are
there is a threshold 𝛾𝑡 such that 𝑡𝐿 ≤ 𝑡𝐿 if 𝛾 ≥ 𝛾𝑡𝑆𝐵 , where 𝛾𝑡𝑆𝐵 satisfies
𝑆𝐵 𝑆𝐴 𝐵𝐴 the same as under no decarbonization investment. Once the absorp-
𝑡𝑆𝐴
𝐿
(𝛾𝑡𝑆𝐵 ) = 𝑡𝐵𝐴
𝐿
(𝛾𝑡𝑆𝐵 ). tive capacity ratio becomes high enough, the first part of Theorem 4
(ii) 𝑤𝑆𝑙𝑖 ≥ 𝑤 𝐵𝑙 ; 𝑚𝑆𝑙 ≤ 𝑚𝐵𝑙 ; 𝑞 𝑆𝐶 = 𝑞 𝐵𝐶 , 𝑞 𝑆𝐴 = 𝑞 𝐵𝐴 , 𝑞 𝑆𝐴 ≤ 𝑞 𝐵𝐴 , for
𝑖 𝑖 𝑖 𝑖 𝑖 𝐻 𝐻 𝐿 𝐿
indicates that under complete information the supplier still gets the
𝑖 = {𝐻, 𝐿}, 𝑙 = {𝐴, 𝐶}. reservation profit regardless of his type. Differing from the existing
literature which suggests that the upstream firm could benefit from
Theorem 3 highlights the interplay between the power structure and investing in decarbonization in a supply chain (e.g., Hong and Guo
the optimal decisions of supply chain firms. The first part says that the (2019) and Hafezi et al. (2023)), our results show that this may not
buyer provides the same investment level under supply-led as that un- always hold true when firms contract to decarbonize. This is because
der buyer-led when she can observe the true absorptive capacity of the the two-part tariff contracts induce the supplier to engage in product
supplier. Under complete information, how much the buyer will invest decarbonization, potentially increasing demand and profitability; how-
to help the supplier decarbonize the product hinges on the absorptive ever, they also allow the buyer to extract benefits from the supplier
capacity rather than the bargaining power. This is because contracting by leveraging the transfer payment, leaving the supplier with only the
for decarbonization occurs before the pricing decisions, and the buyer reservation profit. Under asymmetric information, the type-L supplier
has the option of leveraging the dual contractual parameters to secure obtains the reservation profit, while the type-H supplier is able to
her gains from the investment. As shown in the theorem, the buyer obtain an extra profit, referred to as the information rent, stemming
sets a higher transfer payment if she becomes more powerful. Under from his information advantage over the buyer. This is because the
asymmetric information, similar approaches are utilized to incentivize buyer must guarantee such a type of supplier additional benefits to
the efficient supplier to decarbonize the product. Conversely, the buyer entice him to spontaneously disclose the absorptive capacity, i.e., to
invests less in the inefficient supplier under supply-led than under select the contract intended for his true type from the menu during the
buyer-led, indicating that the existence of private absorptive capacity contracting stage. Otherwise, the incentive compatibility is violated,
creates an incentive distortion on this type of supplier. As such, the and the unreliable supplier will lie about his absorptive capacity to
buyer will set a higher or lower transfer payment to guarantee supplier the buyer, which imposes an adverse influence on profitability and
profitability, depending critically on the absorptive capacity ratio. sustainability outcomes.
It is worthwhile to compare the finding of the extant literature with
The second part of Theorem 4 shows the effects of decarbonization
the second part of Theorem 3. Previous studies have demonstrated
investment and information asymmetry on buyer profitability. Recall
that in the absence of asymmetric information, a firm with greater
that, under any power structure, supply chain decarbonization not only
bargaining power will raise prices to ensure profitability (Liu et al.,
increases the effective demand but also yields higher retail margins,
2022; Niu, Shen, & Zhang, 2022; Tang & Yang, 2020). Our findings
which together enable the buyer to earn more profit. When investment
support this assertion and further reveal that it holds true in the con-
happens, the buyer’s optimal profit under asymmetric information is
text of private absorptive capacity. However, the drivers behind price
higher (lower) than when she invests in the inefficient (efficient) sup-
increases in these scenarios differ. In our model, both the retail price
plier under complete information, and this is independent of the power
and the carbon level influence customers’ purchasing decisions. Conse-
structure. Possible explanations are given below. When contracting
quently, the powerful supplier exploits the environmental impact of the
with the efficient supplier, the optimal investment level, retail margins,
product to charge the buyer a higher wholesale price under investment
and effective demand under asymmetric information are equal to those
compared to no investment, regardless of his type. That is, the increased
under complete information (see Theorem 1), they jointly guarantee
wholesale price is a result of both the reduced carbon level and the
the buyer the best profit from investing in decarbonization. On the
supplier’s bargaining power. In this case, the buyer has an incentive to
contrary, when entering into a contract with the inefficient supplier,
adopt similar pricing strategies, leading to lower optimal retail margins
the buyer is required to bear a greater investment cost under complete
under supplier-led compared to buyer-led. Furthermore, the optimal
information compared to under asymmetric information due to the
demand under supplier-led is equivalent to that under buyer-led when
heightened level of decarbonization investment. This undermines buyer
the absorptive capacity is observable within the supply chain. The same
profitability despite high levels of retail margins and sales. However,
holds true if the type-H supplier engages in decarbonization under
the buyer manages to offset those losses with a share of the profit from
information asymmetry. This finding is supported by the comparison
investing in the efficient supplier. Taken together, the buyer’s optimal
of optimal investment levels as stated in part (i) of Theorem 3. Recall
profit under information asymmetry is greater than when she invests
that the dominant buyer invests more in the inefficient supplier than
in the inefficient supplier under complete information.
when she is less powerful, resulting in a larger environmental impact
of the product outweighing the increased price and ultimately leading The third part of Theorem 4 demonstrates that any firm can benefit
to a higher volume of product sales. from enhanced bargaining power in the existence of decarbonization
investment. The supplier benefits primarily because he is able to charge
the buyer a higher wholesale price under supplier-led, as stated in
5.3. Analysis of firm profitability
Theorem 3. Concretely, it is evident from Table A.2 that the optimal
demand of the efficient supplier remains unchanged, and, thus, in-
Now, we make comparisons of the firms’ optimal profits between creased wholesale price ensures greater profitability for the supplier.
different scenarios to elucidate the implications of information asym- This holds true for the inefficient supplier in the context of complete
metry and power structure, as summarized in Theorem 4. information as well. Under asymmetric information, the inefficient
supplier experiences fewer product sales, but the impact on profitability
Theorem 4. For all 0 ≤ 𝛾 ≤ 1, if 𝛾 < 𝛾 (𝐵𝐴)𝑆𝐴 , the optimal profit is outweighed by the higher wholesale price, which contributes to
of each firm is identical to the case with (buyer-) supplier-led under no improved supplier profitability. From the buyer’s perspective, increased
decarbonization investment. Otherwise, we have: bargaining power allows for the claiming of greater retail margins from
(i) 𝛱𝑆𝑗𝑁 = 𝛱𝑆𝑗𝐶 (𝑘𝑖 ) = 𝛱𝑆𝑗𝐴 (𝑘𝐿 ), and 𝛱𝑆𝑗𝐴 (𝑘𝐻 ) = 𝛱𝑆𝑗𝑁 + 𝛺𝑗𝐴 . product sales, regardless of whether the supplier has private absorptive
(ii) 𝛱𝐵𝑗𝑁 ≤ 𝛱𝐵𝑗𝐶 (𝑘𝐿 ) ≤ 𝛱𝐵𝑗𝐴 ≤ 𝛱𝐵𝑗𝐶 (𝑘𝐻 ). capacity. Under complete information, buyer profitability increases
(iii) 𝛱𝑆𝑆𝑙 > 𝛱𝑆𝐵𝑙 , 𝛱𝐵𝑆𝑙 < 𝛱𝐵𝐵𝑙 , where 𝑖 = {𝐻, 𝐿}, 𝑗 = {𝑆, 𝐵}, with enhanced bargaining power because of more retail margins, while
𝑙 = {𝐴, 𝐶}, 𝛺𝑗𝐴 are given in Table A.2. maintaining the same amount of product sales. When entering into

9
W. Niu et al. Computers & Industrial Engineering 197 (2024) 110573

Fig. 3. Impact of 𝛾 on the equilibrium outcomes (when 𝑎 = 2, 𝑧 = 1, 𝜇 = 0.1, and 𝜙 = 1.25; for 𝑗 = {𝑆, 𝐵}).

contracts with the inefficient supplier, the buyer must provide a higher customers through a buyer possessing private demand information.
investment level under buyer-led than under supplier-led in order Unfortunately, they do not determine whether it is always advanta-
to incentivize decarbonization, which can be detrimental to profit geous for firms to enter into decarbonization agreements, nor do they
improvement. However, the increased retail margins and effective de- incorporate bargaining power into the model. By contrast, we explicitly
mand together outperform the increased investment cost, resulting in outline these necessary conditions, investigate the impact of power
the buyer gaining more profit from enhanced bargaining power. The structure on firm profitability, and uncover insights that have not been
above findings contribute to the current research (e.g., Liu et al. (2022)) thoroughly explored in previous papers.
by demonstrating that any supply chain firm can benefit from enhanced
bargaining power in the context of decarbonization investment and 5.4. Analysis of consumer surplus
private absorptive capacity. These findings also provide a potential
explanation for why powerful retail giants such as Walmart and JD.com The effects of private absorptive capacity and power structure on
are willing to support their suppliers’ efforts towards decarbonization, consumer surplus are described in the following theorem.
as mentioned previously.
Theorem 5. For all 0 ≤ 𝛾 ≤ 1, if 𝛾 < 𝛾 𝑗𝐴 , the equilibrium consumer surplus
In comparison to extant studies on decarbonization under informa-
is the same as in the absence of decarbonization investment. Otherwise:
tion asymmetry (Cai et al., 2023; Raj et al., 2021), Theorem 4 not
(i) 𝐶𝑆 𝑗𝑁 ≤ 𝐶𝑆 𝑗𝐴
𝐻
= 𝐶𝑆 𝑗𝐶
𝐻
, 𝐶𝑆 𝑗𝑁 ≤ 𝐶𝑆 𝑗𝐴𝐿
≤ 𝐶𝑆 𝑗𝐶𝐿
; and
only establishes the conditions for supply chain decarbonization but
(ii) 𝐶𝑆 𝑖 = 𝐶𝑆 𝑖 , 𝐶𝑆 𝐻 = 𝐶𝑆 𝐻 , 𝐶𝑆 𝐿 ≤ 𝐶𝑆 𝐵𝐴
𝑆𝐶 𝐵𝐶 𝑆𝐴 𝐵𝐴 𝑆𝐴
𝐿
, for 𝑖 = {𝐻, 𝐿},
also elucidates how private absorptive capacity and power structure
𝑗 = {𝑆, 𝐵}.
influence firm profitability. Specifically, Raj et al. (2021) develop a
model for supply chain decarbonization, where the buyer’s marginal Theorem 5 shows the effects of decarbonization investment, infor-
production cost is not observable by the dominant supplier. Our find- mation asymmetry, and power structure on customers. The findings
ings reveal that the decision of both firms to engage in supply chain are also illustrated in Fig. 3(c). The first part of the theorem says
decarbonization hinges on thresholds linked to the absorptive capacity that supply chain decarbonization always benefits customers as a result
ratio. When contracting is initiated, any firm can benefit from increased of increased consumer surplus. The intuition is that a lower carbon
bargaining power, irrespective of whether absorptive capacity remains level makes the product more appealing to eco-customers and increases
private information within the supply chain. Cai et al. (2023) exam- demand which, as shown in Eq. (3), yields more consumer surplus.
ine a supply chain consisting of a supplier selling green products to In the situation where decarbonization investment occurs, this part

10
W. Niu et al. Computers & Industrial Engineering 197 (2024) 110573

further indicates that information asymmetry is weakly detrimental carbon footprint remains unaffected by the power structure if the
to the customer compared to when the absorptive capacity of the supplier possesses private absorptive capacity. When the buyer engages
supplier is observable within the supply chain. From Theorem 2, the with the inefficient supplier, the optimal investment and demand levels
optimal investment level under asymmetric information is lower than are lower in the supplier-led scenario compared to the buyer-led one.
under complete information, which generates a higher carbon level Ultimately, the heightened carbon footprint outweighs the reduced
and weakens the incentive for customers to buy, thus reducing the demand in its impact on the equilibrium carbon footprint, exacerbating
consumer surplus to a lower level. the environmental consequences of the supplier-led scenario.
For the implication of power structure, the second part of Theorem 5
demonstrates that it has no influence on consumer surplus in the 5.6. Sensitivity analysis
context of complete information since the demand under supplier-led
equals that under buyer-led, as stated in Theorem 3. When the supplier The purpose of this section is to perform sensitivity analysis to
has private information, consumer surplus remains independent of discuss the impact of key factors such as the absorptive capacity ra-
the power structure if the buyer contacts with the efficient one to tio (𝛾), the probability of an inefficient supplier (𝜃), and the degree
decarbonize. The reason is that there is no distortion on such a type of of consumers’ low-carbon preference on firm profitability, consumer
supplier by the fact that the optimal investment level and demand stay surplus, and the resulting carbon footprint. Due to the complexity
at constant levels compared to the setting with complete information. of the equilibrium outcomes, we conduct several sets of numerical
Nevertheless, contracting with the inefficient supplier hurts customers experiments to gain insights. The values of the basic parameters and the
if the buyer is less powerful. This is perhaps the dominant supplier results are shown in Figs. 3 and A.1. As an aside, those figures verify
would discourage the buyer from actively investing in decarbonization, the main findings in the previous sections. Next, we describe the effects
which weakens the incentives for customers to buy less eco-friendly of those elements and provide possible explanations.
products. Ultimately, the effective demand under supplier-led is lower The effects of 𝛾 are depicted in Figs. 3(a) to 3(d). From the perspec-
than under buyer-led, resulting in less consumer surplus. tive of profitability, the buyer has no incentives to offer the unreliable
supplier contracts to decarbonize the supply chain and, thus, only
5.5. Analysis of the equilibrium carbon footprint obtains her profit the same as that under no investment if 𝛾 is lower
than certain values. Otherwise, we see from Fig. 3(b) that increased 𝛾
In terms of the effects of private absorptive capacity and power enables the buyer to get more profit when the supplier has private infor-
structure on the equilibrium carbon footprint, we have the following mation or when she contracts with the type-L supplier to decarbonize
theorem. under complete information, and this is irrelevant to the power struc-
ture. Larger 𝛾 values mean that the supplier is more efficient in product
Theorem 6. For all 0 ≤ 𝛾 ≤ 1, if 𝛾 < 𝛾 𝑗𝐴 , the equilibrium carbon footprint decarbonization and the buyer is willing to provide a higher investment
equals that under no decarbonization investment. Otherwise: level. As such, the significantly decarbonized product strengthens the
(i) 𝐶𝐹 𝑗𝑁 ≥ 𝐶𝐹 𝑗𝐴 = 𝐶𝐹 𝑗𝐶 , 𝐶𝐹 𝑗𝑁 ≥ 𝐶𝐹 𝑗𝐴 ≥ 𝐶𝐹 𝑗𝐶 ; and motivation for customers to buy, which increases demand and enables
𝐻 𝐻 𝐿 𝐿
(ii) 𝐶𝐹 𝑆𝐶 = 𝐶𝐹 𝐵𝐶
, 𝐶𝐹 𝑆𝐴
= 𝐶𝐹 𝐵𝐴
, 𝐶𝐹 𝑆𝐴
≥ 𝐶𝐹 𝐵𝐴 , for 𝑖 = {𝐻, 𝐿}, the buyer to benefit from the investment. Interestingly, an increase in
𝑖 𝑖 𝐻 𝐻 𝐿 𝐿
𝑗 = {𝑆, 𝐵}. 𝛾 may not necessarily be good for the supplier. According to Fig. 3(a),
when investment happens, there exist some 𝛾 values below which the
Theorem 6 clarifies the implications of information asymmetry information rent is increasing in 𝛾; otherwise, it decreases in 𝛾. To
and power structure for the substitutability outcome, which are also the delight of the type-H supplier, a medium absorptive capacity ratio
portrayed in Fig. 3(c). If the absorptive capacity ratio is low enough, brings him the optimum profit. This is perhaps once 𝛾 exceeds certain
the firms are reluctant to engage in supply chain decarbonization; in values, the buyer has a stronger belief that the type-L supplier could
equilibrium, the carbon footprint is equivalent to that under no invest- assimilate and exploit more newly generated knowledge to decarbonize
ment. Otherwise, the first part of Theorem 6 shows that contracting for the product, which weakens the information advantage of the type-H
decarbonization benefits the environment because of a lower amount of supplier and results in less information rent, regardless of whether he
carbon footprint, compared to the case with no investment. Note that is more powerful than the buyer.
there is a tradeoff between demand growth and product decarboniza- For the end customers, Fig. 3(c) demonstrates that they prefer to
tion when we evaluate the impact of key drivers on substitutability. see a higher absorptive capacity ratio because of increased consumer
From Theorem 1, supply chain decarbonization yields more demand, surplus. As 𝛾 becomes larger, consumer surplus keeps pace with buyer
implying that the supplier emits large amounts of carbon dioxide into profitability mainly because the investment reaches a higher level. A
the environment. In the presence of investment, however, the product substantial reduction in the carbon level dominates the increase in
is decarbonized and becomes more environmentally friendly. Taken prices, leading to demand growth and an improvement in consumer
together, the decreased carbon level surpasses the increased demand, surplus. Furthermore, product decarbonization plays a more important
leading to fewer carbon emissions. Furthermore, we see from this part role than demand growth does in affecting the equilibrium carbon
that the existence of private absorptive capacity is weakly detrimental footprint. Consequently, increasing the absorptive capacity ratio is
to the environment because of increased carbon footprint, compared environmentally beneficial as a result of decreased carbon footprint,
to the case with complete information. The intuition is that when as shown in Fig. 3(d).
contracting with the unreliable supplier, the buyer makes a lower level The effects of 𝜃 are portrayed in Figures A.1(a) to A.1(d). As 𝜃
of investment than when there exists asymmetric information; namely, increases, the buyer (supplier) generally obtains less (more) profit in
the product cannot be significantly decarbonized and the carbon level the context of asymmetric information. To facilitate interpretation,
remains high. In equilibrium, the carbon footprint reaches a higher we take derivatives to get 𝜕𝑥𝑆𝐴 𝐿
∕𝜕𝜃 = 2𝑈 𝑉 (𝜃𝑇3 )−2 (1 − 𝛾)(8𝜙 + 3𝛾𝑉 2 ),
level. 𝜕𝑥𝑆𝐴
𝐿
∕𝜕𝜃 = 𝑈 𝑉 (𝜃𝑇 4 )−2 (1 − 𝛾)(8𝜙 + 3𝛾𝑉 2 ), which are greater than zero

Regarding the impact of power structure on the substitutability for all 0 ≤ 𝜃 ≤ 1, meaning that the buyer will raise the optimal
target, part (ii) of Theorem 6 elucidates that the supplier-led scenario investment level as the probability of the type-L supplier becomes
exhibits comparatively lower environmental friendliness (in a weak larger. Under these conditions, the buyer suffers primarily because
sense) than when the buyer is more powerful. According to Theorem 3, there is a higher likelihood that the investment cannot be substantially
in instances lacking private absorptive capacity, the optimal investment used to decarbonize the product which, together with the increased
and demand levels under supplier-led are equal to those under buyer- investment cost weaken buyer profitability. For the type-H supplier,
led, leading to equivalent carbon footprints. Similarly, the equilibrium higher 𝜃 values mean that he has a prominent information advantage.

11
W. Niu et al. Computers & Industrial Engineering 197 (2024) 110573

The buyer must pay more information rent to induce such a type consumer surplus and increased carbon emissions. Finally, our sensitiv-
of supplier to truthfully report the absorptive capacity, and this is ity analysis underscores the pivotal role of several key model factors.
independent of whether she has a prior claim to the profit-maximizing In particular, an escalation in the absorptive capacity ratio not only
price. The reason customers benefit from higher 𝜃 values is perhaps bolsters buyer profitability but also enhances consumer surplus and
the carbon level of the product reduces to a lower level by the fact facilitates carbon emissions reduction. However, the optimal outcomes
that the buyer invests more in the supplier, which outweighs the effect may not accrue to the efficient supplier, as thresholds exist beyond
of the retail price and thus increases consumer surplus. Similarly, the which information rent diminishes with increasing absorptive capacity.
reduced carbon level dominates the effective demand in affecting the Moreover, augmenting the probability of an inefficient supplier engen-
carbon footprint, allowing the supplier to emit less carbon emissions ders mixed effects, weakening (bolstering) buyer (supplier) profitability
into the environment. while concurrently enhancing consumer surplus and reducing carbon
The effects of 𝑏 are depicted in Figures A.1(e) to A.1(h), revealing emissions. In addition, as customers’ environmental consciousness in-
that larger values of 𝑏 are detrimental to both firms and customers tensifies, firm profitability and consumer surplus may wane, albeit
but beneficial to the environment. As customers become more envi- fostering an environmentally favorable reduction in carbon footprint.
ronmentally conscious, the buyer demonstrates a greater willingness to
increase the investment level to support the supplier in product decar- 6.2. Managerial implications
bonization. Once decarbonization is achieved, both firms, regardless of
their bargaining power, are motivated to convert the decreased carbon Our findings yield several managerial implications that can assist
level into higher prices to enhance profitability. These changes result supply chain firms in better fulfilling CSR while pursuing profits.
in higher retail prices and reduced product sales, ultimately impacting First, the buyer can leverage the investment and monetary incen-
supplier profitability and customer surplus negatively, while the buyer tives to engage the supplier in supply chain decarbonization when
incurs profit losses due to bearing a larger amount of investment cost. private absorptive capacity is present. However, there are two impor-
However, the increased investment level contributes to the product’s tant considerations to bear in mind when employing this strategy: (i)
improved environmental friendliness, which combined with reduced If the supplier proves to be unreliable in utilizing the investment for
demand results in a lower carbon footprint. decarbonization, it becomes imperative to offer customized contracts
based on the true absorptive capacity. (ii) It may not always be the
6. Concluding remarks most strategic decision for the buyer to contract with the supplier for
supply chain decarbonization. The buyer should refrain from engaging
in decarbonization activities when the absorptive capacity ratio is low
In this paper, we have developed contracting models for a buyer
enough. Nevertheless, under favorable conditions, entering into con-
seeking to decarbonize the supply chain with an unreliable supplier.
tracts to decarbonize the supply chain demonstrates the potential for
Our models encompass several crucial factors that could impact both
achieving simultaneous improvements in firm profitability, consumer
profitability and sustainability outcomes, such as private absorptive
surplus, and environmental performance. Second, while the presence
capacity, varying degrees of bargaining power, and customers’ low-
of private absorptive capacity is advantageous for the supplier, it can
carbon preference. Having derived the equilibrium outcomes of these
have adverse effects on the buyer, customers, and the environment.
models, we proceed to conduct comparative statics and sensitivity
From our findings, it is advisable for the supplier to maintain absorptive
analysis to gain insights from a triple bottom line perspective.
capacity at a medium level to maximize profits derived from private
information. Fortunately, the negative impact on buyer profitability,
6.1. Main findings consumer surplus, and carbon footprint is less pronounced. Lastly,
in situations where the supplier is in a position of bargaining disad-
Our main findings, aligned with the research questions introduced vantage, it is recommended that the buyer invests in supply chain
previously, are summarized below. decarbonization. This approach not only enhances profitability and
Firstly, addressing the challenge of incentivizing the unreliable sustainability performance but also contributes to improving consumer
supplier in supply chain decarbonization, we illustrate that achieving surplus. To this end, the buyer may explore alternative strategies
this objective is feasible through the provision of a menu of con- such as bolstering bargaining power through mechanisms like long-
tracts, comprising lump-sum payments and investment commitments. term outsourcing agreements, implementing robust supplier relation-
Crucially, this menu of contracts harbors the potential for a mutually ship management practices, or considering multi-source outsourcing to
beneficial outcome, benefiting firms, customers, and the environment, mitigate dependence on a single supplier.
in stark contrast to scenarios lacking decarbonization agreements be-
tween supply chain firms. Secondly, concerning the influence of the 6.3. Future research
supplier’s absorptive capacity on the buyer’s inclination towards de-
carbonization investment, our analysis uncovers that a low absorptive Our paper has several limitations that present opportunities for
capacity ratio prompts the adoption of a cut-off policy to circumvent future research. Firstly, we focus on a supply chain with a single
engagement in decarbonization contracts. In terms of the impact of supplier and buyer, thereby overlooking the implications of multi-
the power structure, our findings indicate that any firm stands to sourcing procurement decisions for achieving net zero emissions in
gain from enhanced bargaining power. Therefore, strengthening the more complex supply chain structures. One avenue for exploration
buyer’s bargaining position reduces the likelihood of resorting to the involves analyzing scenarios where a buyer collaborates with multi-
cut-off policy, ultimately augmenting consumer surplus and mitigating ple suppliers simultaneously, investigating how supplier competition,
carbon emissions. Thirdly, in examining the ramifications of decar- reliability levels, and variations in absorptive capacity impact both
bonization contracts, we reveal nuanced outcomes contingent upon the profitability and sustainability outcomes. Secondly, our analysis is con-
supplier’s absorptive capacity information. Under private information, fined to product decarbonization at the manufacturing side of the
the buyer’s profitability varies compared to scenarios with complete supply chain. In general, attaining business sustainability necessitates
information, with greater gains observed when contracting with an collaborative efforts among supply chain firms. Thirdly, our model
inefficient supplier and reduced profits when engaging with an efficient operates within a framework devoid of capital constraints. It mer-
one. Information asymmetry confers an advantage to the efficient its investigation into how capital-constrained firms navigate towards
supplier as it helps generate information rent. This, however, detri- achieving net zero emissions. Lastly, the contract menu alternatives we
mentally affects customers and the environment because of decreased propose primarily involve investment levels and transfer payments. It

12
W. Niu et al. Computers & Industrial Engineering 197 (2024) 110573

would be instructive to assess whether our core findings hold true when Guo, L., Zhang, Q., Wu, J., & Gonzalez, E. D. S. (2024). An evolutionary game model
buyers offer suppliers different types of decarbonization contracts. Such of manufacturers and consumers’ behavior strategies for green technology and
government subsidy in supply chain platform. Computers & Industrial Engineering,
an analysis could shed light on the versatility and robustness of our
189, Article 109918.
proposed contract structures. Ha, A. Y. (2001). Supplier-buyer contracting: Asymmetric cost information and cutoff
level policy for buyer participation. Naval Research Logistics, 48(1), 41–64.
CRediT authorship contribution statement Hafezi, M., Zhao, X., & Zolfagharinia, H. (2023). Together we stand? Co-opetition
for the development of green products. European Journal of Operational Research,
306(3), 1417–1438.
Wenju Niu: Writing – review & editing, Supervision, Formal analy- He, L., Wang, H., & Liu, F. (2024). Emission abatement in low-carbon supply chains
sis, Conceptualization. Weili Xue: Conceptualization, Resources, Writ- with government subsidy and information asymmetry. International Journal of
ing – review & editing. Jing Xia: Writing – original draft, Methodology, Production Research, 62(18), 6598–6626.
Formal analysis, Writing – review & editing. Fang Lu: Writing – review Hong, Z., & Guo, X. (2019). Green product supply chain contracts considering
environmental responsibilities. Omega, 83, 155–166.
& editing, Validation, Methodology.
Hosseini-Motlagh, S.-M., Johari, M., & Pazari, P. (2022). Coordinating pricing, warranty
replacement and sales service decisions in a competitive dual-channel retailing
Data availability system. Computers & Industrial Engineering, 163, Article 107862.
Li, G., Li, L., Choi, T.-M., & Sethi, S. P. (2020). Green supply chain management in
No data was used for the research described in the article. Chinese firms: Innovative measures and the moderating role of quick response
technology. Journal of Operations Management, 66(7–8), 958–988.
Li, G., Xue, J., Li, N., & Qi, Q. (2024). Does digital finance favor firms in supply
Acknowledgments chains? Roles of green innovation and bargaining power. Transportation Research
Part E: Logistics and Transportation Review, 183, Article 103431.
The authors thank Editor-in-Chief Yasser Dessouky, the associate Li, X., Zhang, C., & Xu, H. (2024). Cooperation of firms’ environmental innovation in a
supply chain under government regulation. Computers & Industrial Engineering, 192,
editor, and six anonymous reviewers for their constructive comments
Article 110232.
and suggestions. This work was financially supported by the National Liu, W., Wei, W., Choi, T.-M., & Yan, X. (2022). Impacts of leadership on corporate
Natural Science Foundation of China (Grants 72201137, 72371124, and social responsibility management in multi-tier supply chains. European Journal of
71901116) and the Qinglan Project of the Jiangsu Higher Education Operational Research, 299(2), 483–496.
Institutions of China. Mehrjerdi, Y. Z., & Shafiee, M. (2021). A resilient and sustainable closed-loop supply
chain using multiple sourcing and information sharing strategies. Journal of Cleaner
Production, 289, Article 125141.
Appendix A. Supplementary data Mei, Y., Cao, K., Liu, Y., & Mangla, S. K. (2024). Effects of manufacturer fairness
concerns and carbon emission reduction investment on pricing decisions under
Supplementary material related to this article can be found online countervailing power. Journal of Cleaner Production, 461, Article 142616.
Modak, N. M., Sinha, S., Senapati, T., Simic, V., & Pamucar, D. (2024). Game theoretical
at https://doi.org/10.1016/j.cie.2024.110573.
analysis in two-echelon sustainable supply chains to manage and coordinate
strategic decisions. Computers & Industrial Engineering, 192, Article 110204.
References Myerson, R. B. (1979). Incentive compatibility and the bargaining problem.
Econometrica, 47(1), 61–73.
Baliga, S., & Maskin, E. (2003). Chapter 7-Mechanism design for the environment. In Nikoofal, M. E., & Gümüş, M. (2018). Quality at the source or at the end? Managing
K. G. Mäler, & J. R. Vincent (Eds.), Handbook of environmental economics: vol. 1, supplier quality under information asymmetry. Manufacturing & Service Operations
Environmental degradation and institutional responses (pp. 305–324). Elsevier. Management, 20(3), 498–516.
Blanco, C. C. (2022). A classification of carbon abatement opportunities of global firms. Niu, W., Shen, H., & Zhang, L. (2022). Impact of power structure on decarbonizing in-
Manufacturing & Service Operations Management, 24(5), 2648–2665. vestment with uncertain innovation: A triple bottom line perspective. Transportation
Bouchery, Y., Ghaffari, A., Jemai, Z., & Tan, T. (2017). Impact of coordination on costs Research Part E: Logistics and Transportation Review, 160, Article 102654.
and carbon emissions for a two-echelon serial economic order quantity problem. Niu, W., Xia, J., & Shen, H. (2022). Decarbonizing investment in a supply chain with
European Journal of Operational Research, 260(2), 520–533. information asymmetry under innovation uncertainty. Annals of Operations Research,
Cai, J., Sun, H., Shang, J., & Hegde, G. G. (2023). Information structure selection in http://dx.doi.org/10.1007/s10479-022-04761-w, (forthcoming).
a green supply chain: Impacts of wholesale price and greenness level. European Poyago-Theotoky, J. (2007). The organization of R&D and environmental policy. Journal
Journal of Operational Research, 306(1), 34–46. of Economic Behavior and Organization, 62(1), 63–75.
Caro, F., Corbett, C. J., Tan, T., & Zuidwijk, R. (2013). Double counting in supply Raj, A., Modak, N. M., Kelle, P., & Singh, B. (2021). Analysis of a dyadic sustain-
chain carbon footprinting. Manufacturing & Service Operations Management, 15(4), able supply chain under asymmetric information. European Journal of Operational
545–558. Research, 289(2), 582–594.
Chen, X., Wang, X., & Chan, H. K. (2017). Manufacturer and retailer coordination for Shi, R., Zhang, J., & Ru, J. (2013). Impacts of power structure on supply chains with
environmental and economic competitiveness: A power perspective. Transportation uncertain demand. Production and Operations Management, 22(5), 1232–1249.
Research Part E: Logistics and Transportation Review, 97, 268–281. Song, S., Dong, Y., Kull, T., Carter, C., & Xu, K. (2023). Supply chain leakage
Cohen, W. M., & Levinthal, D. A. (1989). Innovation and learning: The two faces of of greenhouse gas emissions and supplier innovation. Production and Operations
R&D. The Economic Journal, 99(397), 569–596. Management, 32(3), 882–903.
D’Amato, A., & Dijkstra, B. R. (2015). Technology choice and environmental regulation Tang, R., & Yang, L. (2020). Impacts of financing mechanism and power structure
under asymmetric information. Resource and Energy Economics, 41, 224–247. on supply chains under cap-and-trade regulation. Transportation Research Part E:
Fan, X., Chen, K., & Chen, Y.-J. (2023). Is price commitment a better solution to control Logistics and Transportation Review, 139, Article 101957.
carbon emissions and promote technology investment? Management Science, 69(1), Xia, J., & Niu, W. (2021). Carbon-reducing contract design for a supply chain with
325–341. environmental responsibility under asymmetric information. Omega, 102, Article
Fu, K., Li, Y., Mao, H., & Miao, Z. (2023). Firms’ production and green technology 102390.
strategies: The role of emission asymmetry and carbon taxes. European Journal of Yang, H., & Chen, W. (2018). Retailer-driven carbon emission abatement with consumer
Operational Research, 305(3), 1100–1112. environmental awareness and carbon tax: Revenue-sharing versus cost-sharing.
Gao, F., & Souza, G. C. (2022). Carbon offsetting with eco-conscious consumers. Omega, 78, 179–191.
Management Science, 68(11), 7879–7897. Yuan, M., Ma, S. H., Guan, X., & Chen, Y. J. (2021). Channel configuration in a
Gopalakrishnan, S., Granot, D., Granot, F., Sošić, G., & Cui, H. (2021). Incentives complementary market under different power structures. Naval Research Logistics,
and emission responsibility allocation in supply chains. Management Science, 67(7), 68(2), 157–158.
4172–4190. Zhang, S., Wang, C., Yu, C., & Ren, Y. (2019). Governmental cap regulation and man-
ufacturer’s low carbon strategy in a supply chain with different power structures.
Computers & Industrial Engineering, 134, 27–36.
Zheng, S., Jiang, C., Fu, X., Ge, Y.-E., & Shu, J. (2022). Subsidies for green technology
adoption under uncertain demand and incomplete information. Omega, 112, Article
102675.

13