Pareto-efficient coordination of the contract-based MTO supply chain under flexible cap-and-trade emission constraint

Abstract

Low-carbon production is key to both economic and environmental sustainability. It is, however, inadequate to meet the low-carbon targets by the manufacturing industry alone. Current research on emission reduction targets mainly at individual optimality, with little consideration of the synergistic benefits achievable through coordination among supply chain players. This paper fills this gap by incorporating Pareto improvement to ensure that all members are likely to gain in emission reduction through coordination. It gives the emission-dependent manufacturers theoretical basis and managerial insights to go through the stringent emission-limited market, especially under a new proposed low-carbon policy of flexible cap-and-trade, which will soon be deployed for emissions trading in China. This flexible cap-and-trade policy aligns emission reduction with capacity adjustments, but its impact has rarely been investigated. Considering the complexity of the supply chain structure, this paper simplifies the problem to two stages: manufacturer and retailer. While the demand uncertainty is considered with Newsvendor models, Stackelberg game is exploited to solve this problem with three contracts, namely revenue sharing, cost sharing, and two-part tariff. Analytical and numerical studies show that the profitability and greenness of the supply chain are increased by coordination with revenue sharing and two-part tariff contracts. The Pareto improvement encourages cooperation between the supply chain members. Managerial insights are given to help emission-dependent manufacturers compete in the increasingly stringent low-carbon environment. The novelty of this paper lies in the investigation of synergistic benefits achievable through coordination under the new flexible cap-and-trade emission policy, and the Pareto-improving conditions with several contracts are analyzed by Newsvendor models.