Accepted Manuscript

Government intervention on a competing supply chain with two green manu-

facturers and a retailer

Raghu Nandan Giri, Shyamal Kumar Mondal, Manoranjan Maiti

PII: S0360-8352(18)30633-8
DOI: https://doi.org/10.1016/j.cie.2018.12.030
Reference: CAIE 5583

To appear in: Computers & Industrial Engineering

Received Date: 10 May 2018

Accepted Date: 11 December 2018

Please cite this article as: Giri, R.N., Mondal, S.K., Maiti, M., Government intervention on a competing supply
chain with two green manufacturers and a retailer, Computers & Industrial Engineering (2018), doi: https://doi.org/
10.1016/j.cie.2018.12.030

This is a PDF file of an unedited manuscript that has been accepted for publication. As a service to our customers
we are providing this early version of the manuscript. The manuscript will undergo copyediting, typesetting, and
review of the resulting proof before it is published in its final form. Please note that during the production process
errors may be discovered which could affect the content, and all legal disclaimers that apply to the journal pertain.
*Title Page including Author Details

Government intervention on a competing supply

chain with two green manufacturers and a retailer
Raghu Nandan Giri, Shyamal Kumar Mondal and Manoranjan Maiti
Department of Applied Mathematics with Oceanology and Computer Programming
Vidyasagar University, Midnapore-721102, India.
E-mail: raghunandan.giri86@gmail.com, shyamal 260180@yahoo.co.in, mmaiti2005@yahoo.co.in

1
 Government intervention on a competing supply
chain with two green manufacturers and a retailer

Abstract
This paper investigates the Government (Govt.) intervention on the decisions of a two-
echelon supply chain (SC) members competing and cooperating with one another. The
environment-conscious Govt. tries to reduce environmental impacts (EIs) of the green
products having different greening levels (environment friendliness). At the same time,
Govt. makes an effort to generate some specific Govt. net revenue (GNR) from the SC
members. The EIs of the products are accounted for based on the amount of carbon emis-
sion which determines the greening level of the products. The GNR is generated from the
collected taxes and penalty at the trading price for the extra amount of emissions. The
Govt. encourages manufacturers to produce greening products by contributing some sub-
sidy. The investigated SC consists of two competitive manufacturers producing separately
one of two substitutable greening products and selling to a common retailer by make-to-
order business policy. The retailer sells to the customers against their demands based on
the selling prices, indirect taxes and greening levels. We develop non-linear bi-level in-
teractive models between the Govt. and SC members. The Govt. is top-level decision
maker collecting taxes from retailer paid by customers and paying subsidy/ imposing fine
to the manufacturers. At the bottom level, there are SC members. The manufacturers
horizontally follow Nash-equilibrium and vertically Stackelberg leader-follower decisions
among the manufacturers and retailer or cooperating with each other. Finally, numerical
experiments are performed on the models and different decisions are derived under nine
scenarios. Sensitivity analyses showing the effects of model parameters are presented.
It is observed that whoever becomes the leader, his/her profit is maximum amongst the
scenarios and within the scenario, who has the highest demand, he/she dominates. Some
managerial insights are also presented.

Keywords: Green supply chain management; Greening products; Substitutable products;

Cap-and-Trade and Tax; Government tariffs; Stackelberg game.

1 Introduction
Nowadays, exponentially increasing human population, especially in the developed coun-
tries makes overuse of the economic products affecting the eco-system globally. Environmental

1
issues such as air, water and soil pollution caused by climate changes, the rise of sea water,
global warming, etc directly affecting people’s lives. As a result, various unexpected diseases
often appear in the human life. Eventually, the existence of the whole civilization is at stake
due to environmental pollution. Therefore, Govt. tries to encourage the producers to maintain
the sustainability of the products related to environmental issues. In this process, Govt. is the
most powerful decision maker in the market, can make rules to reduce pollution and increase
the sustainability of products. Some developed countries such as America, Europe, Japan, etc
have implemented regulations to reduce carbon emissions and applied financial instructions to
the producers and cautioned consumers about the environmental damages. Thus, a Govt. takes
the following actions to reduce the emission:

(i) Through a policy (‘Cap-and-trade’, ’Carbon tax’, etc.) Govt. gives some subsidiaries to
the producers to keep the emission under a certain level (i.e. Carbon cap).

(ii) Instead of the subsidy, Govt. imposes the penalty to the manufacturers if they exceed the
specified limit of emission.

(iii) Through the activities such as the advertisement in mass media, etc., Govt. makes the
people conscious to use the greening (less carbon emission) products, i.e. the products
from the firms emitting the limited emission.

(iv) Moreover, for giving subsidy to manufacturers, advertisement cost, etc. which are part
of the Govt.’s development activities. Govt. collects taxes (i.e. GST, VAT, etc in India)
from the customers through the retailer. This is because all the development activities
of the Govt. are executed by tax payer’s money. These taxes paid by the customers are
transferred to the Govt. in toto by the retailer.

As environmental issues directly affect human lives, environmental awareness among peo-
ple has been nowadays continuously increased. Consumers differentiate the products on the
basis of their effect on nature, either through their utilization or during the production pro-
cess. There is sufficient evidence that the manufacturers are also aware of this. Therefore,
improvement of the product’s greening level by using greening technology appeals the con-
sumers. Mainieri et al. (1997) investigated the variables that predict “green buying” including
awareness about environmental impacts and consumers’ beliefs about environmental issues
and found that women are significantly higher than men on these two aspects. Brécard (2013)
examined the Consumer Environmental Awareness (CEA) and competition between manufac-
turers in terms of greening level and price of the product. He showed that the network effect of
a green product is higher than that of the traditional product and raises utilization of the green
products.
In SC, generally manufacturers produce items and retailer sells them. A price could be
appealing to the consumers since attributes of substitutable items offered are comparable. In
that case, price competition is high. But consumers may also prefer higher prices of environ-
mentally friendly products because they know that making these products is beneficial for the

2
society though these are more expensive. The effects of governmental green logistics and fi-
nancial intervention on the cooperative and competitive SCs have been investigated by several
researchers. In reality, issues related to the government’s utilization of monetary motivations
for environmental protection have been researched in environmental economics. Recently, re-
searchers are mainly focused on environmental protection in green SC under the circumstances
of the Govt. tariffs (tax and/ or subsidy). Bansal & Gangopadhyay (2003) demonstrated that an
approach of discriminatory subsidy is welfare enhancing but mitigates total pollution. Bansal
(2008) further explores the pricing decision and the impact of the environmental policies and
found that subsidy improves greening level while tax reduces the greening level.
In this investigation, we consider four aspects based on consumers behaviors, the products’
impacts on the environment, SC members’ competition & cooperation and Govt. policies.
First, we consider that the demands of the consumers depend on the products’ prices, green-
ing levels and Govt.’s taxes. Secondly, we measure the greening levels of the products which
depend on the emission rate of each unit produced. It is common knowledge that the products
with different greening levels have different EIs. So, we calculate the total EIs of the products
by giving relative pollution weights as the emission rate of the products. Third, we consider
the cap-and-trade and tax policies in the SC members. Finally, we consider the different Govt.
policies and different SC competition and cooperation structures. Based on the considered four
aspects, we develop non-linear bi-level interactive models between the Govt. and SC members
under nine scenarios. The Govt. is the top-level decision maker, acts as a Stackelberg leader
of the integrated system, determines optimal taxes collected from the customers through the
retailer with the aim to minimize EIs. At the bottom level, SC members play as Stackelberg
followers and using backward induction method, they determine their strategies for two decen-
tralized and one centralized decision structures. Then the reduced Govt. problem is solved
using the Generalized Reduced Gradient method (LINGO 14.0). The models are demonstrated
with numerical experiments and the effects of model parameters on the optimal results are pre-
sented in both tabular and pictorial forms. Thus, the contribution of the present investigation is
as follows:

∗ A Govt. intervention model under SC system emitting carbon having two manufacturers
and one common retailer for two substitutable products is considered.

∗ Till now, none considered demand structures of the items to be dependent on prices,
greening levels and taxes. In the present investigation, weightage for total carbon emis-
sion of products depends on its greening level.

∗ Here, both cap-and-trade and tax regulations are considered against the total carbon emis-
sion. By this consideration, the manufacturers are subsidized and encouraged to emit less
carbon and at the same time, they are penalized for excess carbon emission.

∗ Under nine scenarios (three Govt. policies and three SC decision structures) for the
sale of two substitutable items, optimum decisions are derived to have maximum profit

3
 against a more general Govt. controlled SC with two manufacturers and one common
retailer for minimum EIs.

∗ Under the assumed conditions, the proposed model is more realistic than the previously
investigated models.

The rest of the paper is organized as follows: literature related to the study presented in
section (§2) and section (§3) contains the problem description with some assumptions. The
model formulation of competing and cooperating SC members and Govt.’s policies is described
in section (§4) and the solution procedure is described in section (§5). Numerical experiment
for the optimal results of Govt.’s model under nine scenarios are presented in section (§6)
and section (§7) contains management insights. The effectiveness of model parameters for SC
members and Govt.’s policies are studied in section (§8). Last section (§9) contains conclusions
and future extensions.

2 Literature Review
The literature related to the study can be divided into four parts: (i) SC competition &
cooperation (ii) CEA about pollution (iii) Pollution control mechanisms and (iv) Govt. encour-
agement for sustainable development.

SC competition & cooperation: In globalization of businesses, the product and retail competi-
tions increase day-by-day. Thus the products differentiate, SC members competition and coop-
eration are getting importance in the integrated business because it improves the preference of
channel members. Choi (1991), Zhao et al. (2014) formulated SC models for two substitutable
products and solved using game theory framework, pricing decisions are derived which shows
that retail price is lowest under cooperation and leader is beneficial in non-cooperate decision
structure. Ghosh & Shah (2012) investigated green degree and retail price under competitive
and cooperative decision structures of a green SC and showed that the coordination leads to
improve the green degree of the product. Wei et al. (2013), Giri et al. (2017) studied the pricing
competition problems of two complementary products in two-echelon SC. Giri et al. (2016)
extended above models by considering two substitutable and one complementary products in
two-echelon SC. Li et al. (2016) analyzed the pricing strategies of a dual channel SC in which
environmental conscious manufacturers produce green products.
CEA about pollution: Recently, researchers concentrate to incorporate CEA in the study of
eco-friendly products. Increasing environmental awareness may pull a non-green product for
which an environment-friendly substitutable product is available (Conrad, 2005). Among prod-
ucts and retail competitions, the high impact on CEA may increase manufacturer profit as well
as eco-friendly productions (Liu et al., 2012). But, with respect to CEA, the retailer’s profit
increases while the manufacturer’s profit decreases, the sharing contract can help to achieve the
expected profit as centralized structure (Zhang et al., 2015). The consumer awareness and the

4
cost for making eco-friendly product act significant function on making decisions and the posi-
tive awareness is beneficial for manufacturer or central decision maker (Giri & Bardhan, 2016).
The policies in presence of CEA provide the reward for better performer and punish with tax
for a worse performer, appreciate the subsidy policy which dominates the tax policy (Bansal &
Gangopadhyay, 2003). Manufacturers produce greening (environmental friendliness) products
with different greening levels. A product of high greening level emit less pollution but has a
high cost. But, Govt. subsidy policy under positive CEA incentivizes manufacturers to pro-
duce more greening products this may not lead the higher profit of the manufacturers (Yu et al.,
2016).
Pollution control mechanisms: The most effective mechanisms to control pollution are cap-
and-trade and carbon tax regulations. The impacts of these two regulations are different, carbon
tax regulation guides the manufacturers to adjustment of prices while cap-and-trade regulation
guides the quantities’ adjustment to reduce the total emission. In the cap-and-trade system,
emission limit (cap) is imposed by the Govt., if it is insufficient to produce target production,
extra permits should be purchased via trading (Du et al., 2015). Under carbon cap policy,
Qi et al. (2017) studied one supplier and two retailers SC and provided the range of carbon
cap to the policymaker for effectively reduced carbon emissions. The profits and decisions
of SC members are affected by control mechanisms. The reduction of carbon emission de-
creases the members’ profit, but within cap-and-trade regulation, the cap does not affect the
decisions while it has a positive impact on the manufacturer’s profit (Qin et al., 2017). Under
a cap-and-trade scheme, two SCs compete vertically as well as horizontally and finally ob-
tains cooperation brings higher carbon emission reduction rate and lower retail price, which
increases consumers’ welfare (Yang et al., 2017). Under cap-and-trade regulation and con-
sumers’ low-carbon preference, Ji et al. (2017a) analysed an SC model using the Stackelberg
game and concluded that the joint emission reduction strategy is more profitable for both the
manufacturer and the retailer. Ji et al. (2017b) further investigated online to offline SC under
cap-and-trade regulation in the context of low-carbon environment and found that consumers’
preference for low-carbon products can push both the manufacturer and the retailer to increase
low-carbon investment. Bai et al. (2017), Xu et al. (2017) also studied green SC system under
two-part tariffs contracts and carbon cap-and-trade regulation. Krass et al. (2013) investigated
profit maximization problem under carbon tax regulation and found that the increase of tax rate
does not necessarily induce the firm to adopt cleaner technology. Xu et al. (2016) studied the
production and pricing decisions under cap-and-trade and carbon tax regulations and exposed
that the social welfare under cap-and-trade regulation is less effective than the carbon tax reg-
ulation.
Govt. encouragement: The research on Govt. motivation for the sustainable development is
basically focused on the Govt. tariffs (subsidy and punishment). Sheu & Chen (2012) inves-
tigated the governmental financial intervention, tax for each unit of produced item and sub-
sidy for each unit of the collected End-of-Life item from green SC members. They suggested
low-wholesale-price strategies to recycled-component suppliers under green subsidization to

5
stimulate manufacturers’ intention of green product’s production under green taxation. Yang
& Xiao (2017) studied the pricing and greening level decisions of a green SC with government
intervention (subsidy or punishment) and found that governmental interventions increased the
green level of the product. Xiao et al. (2016) formulated a sustainable SC model in which the
Govt. taxes the supplier for the carbon footprint of the product and SC members collaboration
(tax-sharing contract) reduces the footprint of the product. They demonstrated that a central-
ized supply chain that can both increase channel profit and reduce the carbon footprint. Liu
et al. (2017) introduced Govt. subsidies to the firms such that SC members adopt low-carbon
strategy. Their analysis showed that leader is beneficial but after emission reduction, it may not
happen. Xu et al. (2017) derived the optimal pollution reduction and production decision for
a cost-sharing contract with two-part tariffs agreement under cap-and-trade regulation. They
concluded that as the carbon trading price increases, (i) the optimal production quantities firstly
decrease and then remain constant. (ii) the optimal pollution reduction levels firstly increase
and then remain constant. Basiri & Heydari (2017) studied a collaboration model of a tradition
non-green and newly launched green products through one manufacturer and one retailer SC
and showed that the collaboration satisfied more customers as well as more sustainable op-
erations. Madani & Rasti-Barzoki (2017), Zhang & Wang (2017) formulated a mathematical
model between the Govt. and two competitive green and non-green SCs consisting of a manu-
facturer and a retailer. The Govt. encourages customers to prefer green products and penalize
by imposing the tax on non-green products. The Govt.’s revenue used to compensate for envi-
ronmental and social damage caused by these products. The Govt. environmental protection
policies on green and non-green SCs consisting one manufacturer and one retailer has been
considered by Hafezalkotob (2015, 2018), Mahmoudi & Rasti-Barzoki (2018). Here, prod-
ucts’ greenness does not impact on subsidy, tax and pollution. Mahmoudi & Rasti-Barzoki
(2018) showed that impose tariffs are most effective Govt. activity to reduce environmental
impacts. The energy saving levels of green SCs under Govt. incentive has been studied by
Hafezalkotob (2017). He demonstrated that the Govt. can orchestrate green SCs to fulfill the
financial, social and environmental objectives by an appropriate tariff mechanism. Sinayi &
Rasti-Barzoki (2018) studied the Govt. intervention on one manufacturer and one retailer SC
in which sustainable refers to the integration of greening product, consumer surplus and SC
members’ profit. They found that the manufacturer’s and retailer’s cooperation lead to produce
more greening product, increase SC’s profit and increase consumer surplus.
A comparison between previous studies and the present investigation is presented in Ta-
ble 1. The main lacuna of the models discussed above is that the impact of greenness on total
emission was not considered. In this paper, we study Govt. intervention on SC members for
two substitutable greening products whose demands are based on the products’ prices, greening
levels and Govt.’s taxes. Under the cap-and-trade regulation, the effect of product on the envi-
ronment is calculated based on the weightage of total EIs as the emission rate of the products
depends on the greening level. This investigation also presents the effects of model parameters
on optimal decisions of SC members and optimal results of the Govt.

6
 Table 1: A comparison between previous studies and the present investigation.
Nature of Item Supply chain Pollution control Govt. intervention
Authors Substitute Green Competition Cooperation CEA Cap & Trade Subsidy Tax profit
√ √ √ √ √
Sheu & Chen (2012) × × × ×
√ √ √ √ √
Yang & Xiao (2017) × × × ×
√ √
Xiao et al. (2016) × × × × × × ×
√ √ √ √ √
Liu et al. (2017) × × × ×
√ √ √ √ √ √
Xu et al. (2017) × × ×
√ √ √ √
Basiri & Heydari (2017) × × × × ×
√ √ √ √ √ √
Madani & Rasti-Barzoki × × ×
(2017)
√ √ √ √
Zhang & Wang (2017) × × × × ×
√ √ √ √ √ √
Hafezalkotob (2015) × × ×
√ √ √ √ √ √ √ √
Hafezalkotob (2017) ×
√ √ √ √ √ √
Hafezalkotob (2018) × × ×
√ √ √ √ √
Mahmoudi & Rasti- × × × ×
Barzoki (2018)
√ √ √ √ √ √ √
Sinayi & Rasti-Barzoki × ×
(2018)
√ √ √ √ √ √ √ √ √
Present investigation

3 Assumptions and problem description

Insert Fig. 1: Govt. intervention in green SC

This study analyses a two-echelon SC system of two green manufacturers and a retailer.
Here, competition is between two green manufacturers, also competition and cooperation are
amongst manufacturers and retailer. The manufacturers produce two substitutable greening
products and sell to a retailer in a duopoly market given in Fig. 1. Greening products have
lower environmental impacts which measured the greening level of the products. As the prod-
ucts have environmental impacts, the Govt. pays subsidy or penalized fine to reduce pollution
under cap-and-trade regulation. The manufacturers invest in greening technology to reduce car-
bon emissions during production. The environmental awareness customers prefer the greening
product, which means that the high greening investment cost raises the products demand. Nor-
mally, product’s demand is affected by its selling price. Nowadays, in some countries, Govt.
impose some taxes such as GST, VAT, etc. in India and collects those through retailers at the
time of sale of the products. Hence, the product’s demand is affected by the selling price and
said indirect tax. Therefore, the customers buy these products from the retailer based on the
selling prices, greening levels and taxes. The Govt. fixes the tax for each product to support
the manufacturers financially or to use for other purposes. The Govt. is the top-level decision
maker and plays as the Stackelberg leader who decides indirectly the tax claim from the cus-
tomers and at the bottom level, SC members play as the Stackelberg followers. Using backward
induction method, the game between Govt. and SC members is solved. Thus, competing or
cooperating SC members first determine their strategies in two decentralized and one central-
ized decision structures, then the Govt. determines the decisions under three pollution control
policies on the basis of SC members decisions. The notations presented in Table 2 have been

7
used in the model formulation with help of the following necessary assumptions:

Table 2: Notations

i: (i = 1, 2) the product index.

Mi : (i = 1, 2) the manufacturer index.
α: The base (market potential) consumer demands.
θ1 : The substitutability coefficient related to price.
γ: CEA based on greening level.
θ2 : The substitutability coefficient related to greening level.
a: Emission per unit when greening level is zero, a > 0.
b: Coefficient of greening level effect on reducing the emission, b > 0.
η: Greening investment coefficient, η > 0.
K: Carbon emission cap.
F: The minimum revenue of the Govt.
E: The maximum possible environmental impacts.
ce : Unit carbon emission trading price.
ci : Unit production cost of product i.
wi : Manufacturers’ unit wholesale price (decision variable) of product-i.
pi : Retailer’s unit selling price (decision variable) of product-i.
mi : Marginal profit of the product-i, i.e. pi = wi + mi .
qi : Greening level (decision variable) of product-i.
ti : Tax (decision variable) for product-i
p: Price vector.
t: Tax vector.
q: Greening level vector.
w: Wholesale price vector.
Di (): Customers’ demand of the product-i.
EIs(): Total environmental impacts function of the products.
GN R(): The Govt.’s net revenue function.
πMi (): Profit function of i-th manufacturer.
πr (): Profit function of the retailer.
πc (): Profit function of the whole SC.

Assumptions:
(i) All activities are performed within a single period.

(ii) The SC system consists of two environmental conscious manufacturers and one retailer.
Each manufacturer separately produces one of two substitutable greening products by
make-to-order process and sells to a common retailer.

(iii) The products’ demand in the market is affected by the selling prices, taxes and greening
levels. Since the products are substitutable, the demand functions decrease with respect
to its own price, tax and competitor greening level and increase with respect to competitor
price, tax and own greening level. Thus, the demand functions of the products-1 and 2

8
 are considered as
D1 (p, q, t) = α − (p1 + t1 ) + θ1 (p2 + t2 ) + γ(q1 − θ2 q2 )
and
D2 (p, q, t) = α − (p2 + t2 ) + θ1 (p1 + t1 ) + γ(q2 − θ2 q1 ).

(iv) In equilibrium, the products have positive demands and the channel members have non-
negative profits. This assumption is made because channel members are out of business
if they have zero demands and non-positive profits.

(v) The manufacturers produce products-1 and 2, inducing carbon emissions of amount (a −
bq1 ) and (a − bq2 ) per unit of products-1 and 2 respectively. Furthermore, using new
technology carbon emission cannot be completely eliminated, so we assume that 0 <
q1 , q2 < ab .

(vi) Govt. provides a cap-and-trade regulation for emissions, if the total carbon emissions
exceed the cap K, the manufacturer pays fine for excess emissions by trading price ce .
Conversely, if total carbon emissions are less than K, the manufacturer gets the subsidy
for a deficient amount of emissions at the same trading price ce .

(vii) The Govt. is the top-level decision maker, interacts on the bottom level decisions of
SC members by collecting tax from the retailer and paying subsidy/penalized fine to the
manufacturers to reduce environmental impacts.

4 The model formulation

Two manufacturers (say) M1 and M2 separately produces one of two greening products 1
and 2 by make-to-order process for the customers demands D1 (p, q, t) and D2 (p, q, t). The
profit of each manufacturer is generated from the total sales revenue, total production cost,
subsidy/fine for slack/surplus amount of carbon emissions and greening investment cost. The
greening investment cost involves the expenditure for technological development/ induction of
new technology at production, better raw materials, R & D establishment, etc. so that GHG
emission is reduced. Therefore, the manufacturers M1 and M2 profit functions are
ηq12
πM1 (w, q, t) = w1 D1 (p, q, t) − c1 D1 (p, q, t) − ce [(a − bq1 )D1 (p, q, t) − K] − (1)
2
ηq 2
πM2 (w, q, t) = w2 D2 (p, q, t) − c2 D2 (p, q, t) − ce [(a − bq2 )D2 (p, q, t) − K] − 2 (2)
2
ηq 2 ηq 2
Here 21 and 22 are the total investment costs against greening levels. The quadratic form of
expenditure is assumed to have a convex nature of cost against greenness.
The retailer purchases products-1 and 2 from the manufacturers and sells to the customers.
Therefore, the retailer’s profit is generated from the total sales revenue and total purchasing
cost, which is
πr (p, w, q, t) = p1 D1 (p, q, t) + p2 D2 (p, q, t) − w1 D1 (p, q, t) − w2 D2 (p, q, t) (3)

9
The supply chain consists of two manufacturers and one retailer expect the total chain profit as
the sum of manufacturers’ and retailer’s profits. It is given as
πc (p, q, t) = πM1 (w, q, t) + πM2 (w, q, t) + πr (p, w, q, t) = (p1 − c1 )D1 (p, q, t)
ηq12
+(p2 − c2 )D2 (p, q, t) − ce [(a − bq1 )D1 (p, q, t) − K] − 2
(4)
ηq22
−ce [(a − bq2 )D2 (p, q, t) − K] − 2
The environment responsible Govt. reduces the carbon emissions of the green products with
different greening levels due to specific Govt. net revenue (GNR). Since the products preserve
different environmental impacts, the Govt. considers the relative pollution weights for environ-
mental impacts of the products as the carbon emissions rates depend on greening levels. These
weights for the products have been assumed as constants by the earlier investigators (Hafeza-
lkotob, 2015, 2017, Zhang & Wang, 2017). But, these weights should depend on the greenness
of the products in the negative sense. Here we have assumed these weights as a − bqi , a and
b being constant as mentioned in Table 2. The carbon emissions rate for the product i with
greening level qi is (a − bqi ). Therefore, the total environmental impacts for products- 1 and 2
is
EIs(t1 , t2 ) = (a − bq1 )D1 (p, q, t) + (a − bq2 )D2 (p, q, t). (5)
Also, we consider the financial gain of the Govt. which is equal to the net revenue from
tax, penalty price minus expenditure for manufacturers’ subsidize. Therefore, the Govt.’s net
revenue is
GN R(t1 , t2 ) = ce [(a − bq1 )D1 (p, q, t) − K] + t1 D1 (p, q, t)
(6)
+ce [(a − bq2 )D2 (p, q, t) − K] + t2 D2 (p, q, t).

4.1 SC members’ competition (Decentralized)

The decision-making structures of competing SC members are always decentralized, which
we consider vertically (i.e. between manufacturers and retailer) Manufacturers-leadership (ML)
and Retailer-leadership (RL) Stackelberg equilibriums and horizontally (i.e. between manufac-
turers) Nash equilibrium. Therefore, the SC decisions structures can be formulated as

ML structure:
 RL structure:



  max πM1 (w, q, t) 
 max πr (p, w, q, t)

 (w1 ,q1 ) 
 (p1 ,p2 )
 
  max πM2 (w, q, t)
  Subject to the decisions of

(w2 ,q2 ) and
(7)  (8)
 Subject to the decisions of   max πM1 (w, q, t)

 
 (w1 ,q1 )
 
max πr (p, w, q, t)  max πM2 (w, q, t)

 

 
(p1 ,p2 ) (w2 ,q2 )

For given Govt.’s taxes t1 and t2 , competing SC members determine their strategies for two
decentralized decision structures applying backward induction method. In ML structure, the
retailer first analyses his retail prices, then the manufacturers find the optimal wholesale prices
and greening levels on the basis of retailer optimal decision. In RL structure, the manufacturers
first analyse their wholesale prices and greening levels, then the retailer finds the optimal retail

10
prices on the basis of the manufacturers’ optimal decision.
Since in ML structure, the retailer is the follower of the SC, first, maximize his/her profit
for the manufacturers’ announced wholesale prices and greening levels. Then manufacturers
rationally react on the best response of the retailer’s selling prices. Using these facts we derive
the following proposition.

Proposition 1. In ML structure,
(i) the retailer’s profit function of the SC given in Eq. (3) is concave with respect to the retail
prices p1 and p2 .
(ii) the retailer’s optimal retail prices p∗1 and p∗2 are given by Eqs. (A.3) and (A.4).
(iii) the manufacturers’ profit functions of the SC given in Eqs. (1) and (2) are concave with
respect (w. r.) to own’s wholesale price and greening level if 4η > (γ + bce )2 .
(iv) The manufacturers’ optimal wholesale prices w1∗ and w2∗ and greening levels q1∗ and q2∗
are respectively given by Eqs. (B.5), (B.7), (B.6) and (B.8).

Proof of Proposition 1 is given in Appendices A and B.

In reality, the products preserve different environmental impacts and it is based on carbon
emission rates that depend on greening levels. Also, carbon emission rate of a product is
strictly positive, never can reach to zero by using any greening technology. From the mentioned
concept we derived the following proposition.

Proposition 2. In ML structure, the carbon emission rates for the products-1 and 2 are strictly
positive if the conditions (9) and (10) hold.

Proof. The carbon emission rates of the products-1 and 2 are a − bq1∗ > 0 and a − bq2∗ > 0.
Substituting the value of q1∗ and q2∗ given in Eqs. (B.6) and (B.8), we obtain
[2η(2 − θ1 )a − {bα + γa(1 − θ2 )}A1 ]{2η(2 + θ1 ) − A1 (A1 + A2 )} + A1 {2η(2 − θ12 )
(9)
−A1 (A1 − θ1 A2 )}(c1 + t1 ) + A1 (A1 A3 − 2ηθ1 )(c2 + t2 ) > 0
[2η(2 − θ1 )a − {bα + γa(1 − θ2 )}A1 ]{2η(2 + θ1 ) − A1 (A1 + A2 )} + A1 {2η(2 − θ12 )
(10)
−A1 (A1 − θ1 A2 )}(c2 + t2 ) + A1 (A1 A3 − 2ηθ1 )(c1 + t1 ) > 0
as 2η(2 + θ1 ) > A1 (A1 + A2 ). Where expressions of Ai , (i = 1, 2, 3) are given in Table C.1.

Since in RL decision structure, the manufacturers are the followers of the SC applying
backward induction method, first determine optimal wholesale prices and greening levels to
maximize their profits for the retailer announced retail prices. Then retailer rationally react on
the best response of the manufacturers’ wholesale prices and greening levels. Using these facts
we derive the following proposition.

Proposition 3. In RL structure,
(i) the manufacturers’ profit functions of the SC given in Eqs. (1) and (2) are concave w. r.
to own’s wholesale price and greening level if 2η > (γ + bce )2 .

11
 (ii) The manufacturers’ optimal wholesale prices w1∗ and w2∗ and greening levels q1∗ and q2∗
are respectively given by Eqs. (C.5), (C.7), (C.6) and (C.8).
(iii) the retailer’s profit function of the SC given in Eq. (3) is concave w. r. to the retail
prices p1 and p2 if η(2 + θ1 ) > A1 (A1 + A2 ) and η(2 − θ1 ) > A1 (A1 − A2 ) hold, where
expressions of Ai , (i = 1, 2) are given in Table C.1.
(iv) the retailer’s optimal retail prices p∗1 and p∗2 are given by Eqs. (D.1) and (D.2).

Proof of Proposition 3 is given in Appendices C and D.

Similarly as ML decision structure, RL decision structure products have positive environ-

mental impacts which never reduce to zero infer the following proposition.

Proposition 4. In RL structure, the carbon emission rates for the products-1 and 2 are strictly
positive if the conditions (11) and (12) hold.

Proof. The optimal carbon emission rates of products-1 and 2 are a − bq1∗ > 0 and a − bq2∗ > 0.
Substituting the value of q1∗ and q2∗ given in Eqs. (C.6) and (C.8), we obtain
aA5 A6 > bA1 {A6 α − A7 (p∗1 + t1 ) + A8 (p∗2 + t2 )} (11)
aA5 A6 > bA1 {A6 α − A7 (p∗2 + t2 ) + A8 (p∗1 + t1 )} (12)
where values of p∗1 and p∗2 are given in Eqs. (D.1) and (D.2) and expressions of Ai , (i =
1, 5, 6, 7, 8) are given in Table C.1.

4.2 SC members’ cooperation (Centralized)

We consider SC members cooperate each other and act as a centralized decision maker.
Here, it is assumed that chain members do not try to maximize their own profit, but rather total
profit of the SC. Hence, manufacturers and retailer function as a single player and collective
decisions and profit are determined. In Centralized Decision (CD) structure, it is not always
possible to determine individual decisions and profit by cooperation. Therefore, the CD struc-
ture can be formulated as
CD structure:
max πc (p, q, t) (13)
(p1 ,p2 ,q1 ,q2 )
For given taxes t1 and t2 , SC members jointly determine decisions and chain profit in CD
structure like tradition optimization techniques.

Proposition 5. In CD structure,
(i) the profit function of the SC given in Eq. (4) is concave with respect to p1 , p2 , q1 and q2
if θ1 < 1; γ 2 (θ1 − θ2 )2 < (1 − θ12 ){2η − (γ + bce )2 }; {(1 − θ2 )γ + (1 − θ1 )bce }2 >
2(1 − θ1 )η and {(1 + θ2 )γ + (1 + θ1 )bce }2 > 2(1 + θ1 )η hold.
(ii) the optimal retail prices (p∗1 , p∗2 ) and greening levels (q1∗ , q2∗ ) are respectively given by
Eqs. (E.2), (E.3), (E.4) and (E.5).

12
Proof of Proposition 5 is given in Appendix E.
Similar as ML and RL decision structures, CD decision structure products have positive envi-
ronmental impacts which gives a − bq1∗ > 0 and a − bq2∗ > 0, where q1∗ and q2∗ are given in
Eqs. (E.4) and (E.5).

4.3 Govt.’s model

Recently, several Govts. are enacting various stringent rules and regulations day by day
on carbon emission by manufacturers for the welfare of the society. For this purpose, several
Govts. have introduced “Cap and trade” policy in different forms. Govt. fixes a particular level
(Cap) for emission. If the emission is more than that amount, a penalty is imposed and if it is
less, some incentives are given to the manufacturers for encouragement. Again, to compensate
for this expenditure, Govt. collects taxes from the customers through the retailer in the form of
VAT, GST, etc. (in India).
Under this system, the Govt. is the top-level decision maker of the integrated system (i.e.
Govt., manufacturers and retailer), acts as a Stackelberg leader, determines optimal taxes col-
lected from the retailer indirectly paid by the customers with the aim to support the green
manufacturers financially for reducing carbon emissions and ensures the SC members to have
a definite profit for long run business in the competing market. The Govt. uses three policies
for controlling environmental pollution which are as follows:
Pollution control policy (PCP): Min EIs(t1 , t2 ) subject to GN R(t1 , t2 ) ≥ F

Revenue explore policy (REP): Max GN R(t1 , t2 ) subject to EIs(t1 , t2 ) ≤ E

Pollution control and revenue explore policy (PCREP): Max GN R(t1 , t2 ) − λEIs(t1 , t2 )
Here, the maximum environmental impacts (E) and the minimum Govt. net revenue (F) are
pre-specific. The positive value of F shows that the Govt. expects positive revenue from the SC
members and the negative value of F indicates that Govt. budget has been used for supporting
green production.

Insert Fig. 2: Surface of EIs(t1 , t2 ).

Insert Fig. 3: Surface of GN R(t1 , t2 ) with contour.

Insert Fig. 4: Surface of GN R(t1 , t2 ) − 0.2EIs(t1 , t2 ) with contour.

For the parametric values mentioned in section (§6) and critical decisions of supply chain
members, the surfaces and contours of above three control policies are depicted in Figs. 2, 3
and 4 respectively. The Fig. 2 corresponding to the objective of PCP is convex in nature with
respect to t1 and t2 . Change of its slope is very small and Figs. 3 and 4 corresponding to REP
and PCREP are concave in nature.

Insert Fig. 5: Different scenarios of Govt. intervention in SC members

13
 We analyse the feasible regions of Govt. tariffs under above three Govt. policies such that
the competing or cooperating SC members stay in business. The aim of the Govt. is to deter-
mine optimal tariffs subject to the feasible region under different policies. Depending on the
different Govt. policies and SC members competition and cooperation structures, the problem
can be classified into nine scenarios which are given in Fig. 5. The mathematical formulation
of nine scenarios–1a, 1b, 1c, 2a, 2b, 2c, 3a, 3b and 3c are presented in Eqs. (14), (15), (16),
(17), (18), (19) and (20).

Scenario-1a: Scenario-1b:

 min EIs(t1 , t2 ) 
 min EIs(t1 , t2 )

 (t1 ,t2 ) 
 (t1 ,t2 )
 
Subject to the constraints Subject to the constraints

 


 

 



 GN R(t1 , t2 ) > F 


 GN R(t1 , t2 ) > F
a − bq1∗ > 0 a − bq1∗ > 0

 


 

 
∗ ∗
−bq2 > 0 − bq2 > 0
 
a a

 
  max πM1 (w, q, t) 
 
 max πr (p, w, q, t)
(w1 ,q1 ) (p1 ,p2 )

  
 

 
 
 

max πM2 (w, q, t)  Subject to the decisions of

 
  
 
 

 (w2 ,q2 ) 
 


  Subject to the decisions of


   max πM1 (w, q, t)

 
 
 
 (w1 ,q1 )
   
max πr (p, w, q, t) max πM2 (w, q, t)
   
 
  
 
 
(p1 ,p2 ) (w2 ,q2 )
(14) (15)

Insert Fig. 6: Feasible region of scenario-1a.

In scenario-1a, Govt.’s policy minimizes the environmental impacts EIs(t1 , t2 ) subject to

the feasible region obtained by the GNR which is at least pre-declared revenue (F), products
have positive carbon emission rates and the optimal decisions of competing SC members are
derived under ML decision structure. The objective function EIs(t1 , t2 ) is a quadratic function
in t1 and t2 and the feasible region is depicted in Fig. 6 for the data given in section(§6) made by
the quadratic expression GN R(t1 , t2 ) > F and linear expression a − bq1∗ > 0 and a − bq2∗ > 0
on the optimal decisions of SC members under ML decision structure. Overall, it is a non-linear
bi-level interactive programming problem (NLBLIPP) in which objective function is quadratic
and constraints are mixed linear and quadratic. The problem’s type and nature of scenario-1b
is same as scenario-1a except the SC members’ decisions are decided by RL decision structure.

14
 Scenario-2a: Scenario-2b:

 max GN R(t1 , t2 ) 
 max GN R(t1 , t2 )

 (t1 ,t2 ) 
 (t1 ,t2 )
 
Subject to the constraints Subject to the constraints

 


 

 



 EIs(t1 , t2 ) < E 


 EIs(t1 , t2 ) < E
a − bq1∗ > 0 a − bq1∗ > 0

 


 

 
∗ ∗
−bq2 > 0 − bq2 > 0
 
a a

 
  max πM1 (w, q, t) 
 
 max πr (p, w, q, t)
(w1 ,q1 ) (p1 ,p2 )

  
 

 
 
 

max πM2 (w, q, t)  Subject to the decisions of

 
  
 
 

 (w2 ,q2 ) 
 


  Subject to the decisions of


   max πM1 (w, q, t)

 
 
 
 (w1 ,q1 )
   
max πr (p, w, q, t)  max πM2 (w, q, t)

 
 
 

   
(p1 ,p2 ) (w2 ,q2 )
(16) (17)

Insert Fig. 7: Feasible region of scenario-2a.

In scenario-2a, Govt.’s policy maximizes the net revenue GN R(t1 , t2 ) subject to the fea-
sible region depicted in Fig. 7 for the data given in section(§6) obtained by the constraints
EIs(t1 , t2 ) < E, i.e. EIs is at most pre-declared maximum value (E), products are having
positive carbon emission rates and optimal decisions of competing SC members are derived
under ML decision structure. The problem’s type and nature of scenarios-2a, 2b are similar as
in scenarios-1a, 1b.

Scenario-3a: Scenario-3b:
 
 max GN R(t1 , t2 ) − λEIs(t1 , t2 )  max GN R(t1 , t2 ) − λEIs(t1 , t2 )


 (t1 ,t2 ) 

 (t1 ,t2 )
 


 Subject to the constraints 

 Subject to the constraints
 
a − bq1∗ > 0 a − bq1∗ > 0

 


 

 
∗ ∗
 a −bq2 > 0  a − bq2 > 0

 


  (w max πM1 (w, q, t) 
 max πr (p, w, q, t)
1 ,q1 ) (p1 ,p2 )

 
 
 


  
 
max πM2 (w, q, t)  Subject to the decisions of

 
  
 

 (w2 ,q2 )

 
 max πM1 (w, q, t)

 

Subject to the decisions of
   
(w1 ,q1 )

 
 
 


  
 
max πr (p, w, q, t) max πM2 (w, q, t)

    
  
 
(p1 ,p2 ) (w2 ,q2 )
(18) (19)

Insert Fig. 8: Feasible region of scenario-3a for different objective values

Insert Fig. 9: Feasible region of scenario-3a for different weights

In scenario-3a, Govt.’s policy simultaneously maximizes net revenue and minimizes envi-
ronmental impacts with appropriate weightage (λ) subject to the feasible region depicted in
Fig. 8 obtained by the restriction that the products have positive carbon emission rates and op-
timal decisions of SC members. Figs. 8 and 9 are respectively obtained for different values of

15
objective function and the different values of the weight (λ) under scenario-3a. Scenario-3b is
similar as scenario-3a except that SC members take the decision by RL decision structure.
The scenarios-1c, 2c and 3c are respectively formulated under three Govt. policies–PCP,
REP and PCREP in SC members’ cooperation. The problems’ type and nature of the scenarios-
1c, 2c and 3c are respectively similar as scenarios-1a, 2a and 3a. But due to SC members’
cooperation, optimal results are different.

Scenario-1c: Scenario-2c: Scenario-3c:

min EIs(t1 , t2 ) max GN R(t1 , t2 ) max GN R(t1 , t2 ) − λEIs(t1 , t2 )
(t1 ,t2 ) (t1 ,t2 ) (t1 ,t2 )
Subject to Subject to Subject to
GN R(t1 , t2 ) > F EIs(t1 , t2 ) < E a − bq1∗ > 0
a − bq1∗ > 0 a − bq1∗ > 0 a − bq2∗ > 0
a − bq2∗ > 0 a − bq2∗ > 0 max πc (p, q, t)
(p1 ,p2 ,q1 ,q2 )
max πc (p, q, t) max πc (p, q, t) (20)
(p1 ,p2 ,q1 ,q2 ) (p1 ,p2 ,q1 ,q2 )

5 Solution Methodology
The models under different scenarios are of two levels–bottom and top levels. At the bottom
level, there are two echelons–two manufacturers and one retailer (Fig. 1) and Govt. is in the
top-level. These problems are termed as NLBLIPPs. First, the bottom level problem is solved
using a game theoretic approach (Stackelberg equilibrium, cf. Appendix F) and after that, with
the outcome, the top level problem is formulated and solved following the Generalized Reduced
Gradient method using standard non-linear solver LINGO 14.0.

6 Numerical Experiment
We consider the following input values of the parameters in appropriate units for numerical
illustration of the model under nine scenarios. Effectability examinations of model parameters
are also performed. The model parametric values are:
c1 = 51.0, c2 = 49.0, α = 80, γ = 2.3, θ1 = 0.67, θ2 = 0.35, a = 120,

b = 1.2, ce = 0.75, η = 8.2, K = 1000, E = 4000, F = 1400, λ = 0.4.

Now, optimal results of the proposed model are computed against three Govt.’s policies and
two decentralized decision structures of competing SC members. These optimal results of six
scenarios-1a, 1b, 2a, 2b, 3a, and 3b are tabulated in Table 3.
From the Table 3, it is observed that EIs is less in scenario-3a (2707.60) than those in
scenarios-1a, 2a, 1b, 3b, and 2b, arranged in ascending order. The GNR is highest in scenario-
2b (2936.07) than the scenarios-3b, 1b, 2a, 1a, and 3a. The greening levels of the products are
highest in scenario-2b (8.87, 9.24) than the scenarios-3b, 1b, 2a, 1a, and 3a. From assumptions

16
 Table 3: Optimal results of Govt.’s model for decentralized decision structures.
Optimal decision variables Optimal objectives’ values
scenarios- t∗1 t∗2 w1∗ q1∗ w2∗ q2∗ p∗1 p∗2 Els GN R πM1 πM2 πr πc
1a 21.92 23.02 162.84 5.17 161.54 5.33 203.49 202.44 3060.03 1400.01 991.32 1007.03 1097.57 3095.92
1b 39.63 40.45 151.22 6.15 149.96 6.59 182.12 181.44 3667.27 2557.90 843.24 857.10 1018.51 2718.86
2a 11.01 12.15 165.88 5.89 164.54 6.05 212.09 211.00 3450.58 1442.28 1063.12 1080.18 1416.90 3560.19
2b 13.25 14.24 155.74 8.87 154.37 9.24 199.83 198.96 5063.75 2936.07 943.83 960.69 2057.64 3962.16
3a 31.61 32.69 160.14 4.53 158.86 4.70 195.86 194.83 2707.60 1291.46 935.45 949.57 847.91 2732.93
3b 24.63 25.56 153.79 7.70 152.46 8.09 192.19 191.39 4471.85 2869.76 896.04 911.62 1564.72 3372.38

(iii) and (v), the demand and emission rate of an item increases and decreases respectively with
its greening level. From Eq. (5), EIs depends on both demand and emission rate, these increase
with respect to both demand and emission rate. Hence, in EIs, the effect of demand dominates
over the reduced emission rate.
The manufacturers’ profits are highest in scenario-2a (1063.12, 1080.18) than the scenarios-
1a, 2b, 3a, 3b, and 1b and the optimal wholesale prices are highest in scenario-2a (165.88, 164.54)
than the scenarios-1a, 3a, 2b, 3b, and 1b. This is because more marginal prices (wi −ci ) of man-
ufacturers generate much profits. As in scenarios of a-group, the manufacturer is the leader and
hence the corresponding marginal price is also more than b-group, which fetches the maximum
profit.
The retailer’s profit is highest in scenario-2b (2057.64) than the scenarios-3b, 2a, 1a, 1b, and
3a and the optimal selling prices are highest in scenario-2a (212.09, 211.00) than the scenarios-
1a, 2b, 3a, 3b, and 1b. Greening level in scenario-2b (8.87, 9.24) is highest than the scenarios-
3b, 1b, 2a, 1a, 3a, arranged in descending orders and hence demand in scenario-2b will be
highest. As retailer is the leader, retail prices and marginal prices of b-group scenarios respec-
tively are normally less and more than those of a-group scenarios. For these reasons, retailer’s
profit is highest in scenario-2b.

Table 4: Optimal results of Govt.’s model for centralized decision structure.

Optimal decision variables Optimal objectives’ values
scenarios- t∗1 t∗2 q1∗ q2∗ p∗1 p∗2 Els GN R πc
1c 76.05 78.95 7.26 6.13 166.11 163.12 2262.39 1759.52 1752.82
2c 52.30 53.21 12.67 14.03 189.46 188.66 4188.08 3769.35 2502.14
3c 35.86 37.22 17.30 18.10 205.73 204.43 5279.01 4414.56 3261.69

The optimal results are computed under three Govt. policies-PCP, REP and PCREP and one
centralized decision structure (CD) of SC members. The optimal results of these scenarios-1c,
2c and 3c are tabulated in Table 4.
From the Table 4, it is found that the products’ greening levels are highest in scenario-3c
(17.30, 18.10) than the scenarios-2c and 1c. The effective products’ prices (pi + ti , i = 1, 2) in
scenarios-1c, 2c and 3c are almost same. From assumptions (iii) and (v), the demand and the
emission rate for an item increases and decreases respectively with its greening level. Hence,
customer demands in scenario-3c are more than the scenarios-2c and 1c, which fetches more

17
chain profit, GNR and EIs in scenario-3c than the scenarios-2c and 1c. In EIs, it is noted that
the effect of demand dominates against the reduced emission rate. The comparison between
centralized and decentralized decision structures is as follows:

(i) The tax of each product is more in centralized structure than the decentralized structures,
but the retail price and chain profit are less in centralized structure than the decentralized
structures for Govt. policies–PCP and REP.

(ii) The GNR in the centralized structure is more than the decentralized structures for Govt.
policies–REP and PCREP.

(iii) With respect to EIs, the centralized structure is best under Govt. policy–PCP and is the
worst under Govt. policy–PCREP.

7 Managerial Insights
In this investigation, there is three separate managements with respect to two manufacturers
and one retailer. Considering the Table 3, it can be concluded that each management should
try to be a leader to have maximum own profit. This is as per expectation. Here, it is to be
noted that when the retailer has the maximum profit, Govt. has also maximum earning. But,
they earn their maximum shares at the cost of maximum damage to the society as the carbon
emission is maximum in this case, which is not desirable. In this analysis, the management side
of the retailer is in a problem because his/her more earning brings more damage to the society.
Administration of a welfare Govt. should accept the scenario-3a ( the PCREP Govt. policy
with ML structure in SC) though it gives the lowest income and profits to all parties (Govt.,
manufacturers and retailer) as it makes the least damage to the society. With respect to the
Govt., the centralized structure is better than the decentralized one as Govt.’s earning is more
in the first case. With respect to EIs, centralized and decentralized structures are preferable
against PCP and PCREP policies respectively

8 Sensitivity analysis
The effectivity of system parameters on the optimal decisions of SC members and Govt.
are performed for the numerical data given in (§6) and tabulated in Tables 5, 6 and 7. These are
also presented graphically in Figs. 10 and 11.

Insert Fig. 10: Tax (t1 ) vs profit of SC members under ML and RL structures.

Insert Fig. 11: Tax (t2 ) vs profit of SC members under ML and RL structures.

From Figs. 10 and 11, it is observed that when the taxes t1 and t2 are increased, then the
corresponding manufacturer’s profit decreases and competitor manufacturer’s profit increases

18
for the ML and RL decision structures. Also, the retailer’s profit decreases for both ML and
RL decision structures. This is obvious from the considered demand structures that when the
tax t1 is increased, then the demand of product 1 decreases and product 2 demand increases
and similar scenario is for tax t2 . In Figs. 10 and 11, super scripts ‘ml’ and ‘rl’ are used for the
decision structure ML and RL games.

Table 5: Effects of c1 , c2 and η on the optimal decisions of SC members.

SC members’ competition
structures Manufacturers-leadership (ML) Retailer-leadership (RL)
parameters Optimal decisions Optimal objectives Optimal decisions Optimal objectives
∗ ∗ ∗ ∗
values w1 q1 w2 q2 p∗
1 p∗
2 π M1 π M2 πr ∗
w1 ∗
q1 w2 ∗ ∗
q2 p∗
1 p∗
2 π M1 π M2 πr
30.00 155.95 8.51 160.18 5.01 211.12 209.99 1403.89 976.92 1842.74 143.37 14.06 150.57 6.96 199.59 197.28 1237.51 869.38 2857.90
35.00 158.31 7.88 161.43 5.31 211.51 210.67 1311.46 1004.49 1744.48 146.40 12.87 151.70 7.64 200.11 198.41 1158.49 893.83 2685.39
c1
40.00 160.67 7.26 162.68 5.60 211.89 211.35 1226.08 1033.65 1651.69 149.42 11.68 152.82 8.32 200.63 199.54 1086.46 920.55 2528.12
45.00 163.04 6.64 163.93 5.90 212.27 212.03 1147.73 1064.39 1564.38 152.44 10.49 153.95 8.99 201.15 200.67 1021.40 949.55 2386.10
50.00 165.40 6.01 165.18 6.20 212.65 212.71 1076.42 1096.71 1482.54 155.46 9.30 155.08 9.67 201.67 201.80 963.33 980.83 2259.32
30.00 161.12 4.76 156.45 8.63 210.14 211.40 954.87 1422.21 1812.90 151.78 6.48 143.83 14.33 197.49 200.04 853.61 1256.53 2823.47
35.00 162.37 5.06 158.81 8.00 210.82 211.78 981.11 1328.44 1714.17 152.90 7.16 146.85 13.14 198.62 200.56 876.46 1175.92 2647.47
c2
40.00 163.62 5.35 161.17 7.38 211.50 212.16 1008.94 1241.72 1620.90 154.03 7.84 149.87 11.95 199.75 201.08 901.59 1102.29 2486.72
45.00 164.87 5.65 163.54 6.75 212.18 212.54 1038.34 1162.04 1533.12 155.16 8.52 152.89 10.76 200.87 201.60 928.99 1035.65 2341.22
50.00 166.12 5.95 165.90 6.13 212.86 212.92 1069.32 1089.39 1450.81 156.29 9.20 155.91 9.57 202.00 202.13 958.68 975.98 2210.96
6.50 166.86 8.18 166.56 8.71 218.53 218.87 1084.57 1129.80 1784.20 158.81 15.74 159.13 17.79 204.52 205.84 967.08 1027.24 3149.73
7.50 166.20 6.65 165.80 7.08 214.67 214.86 1070.44 1112.41 1569.60 156.88 11.00 156.35 12.01 202.60 203.06 960.99 1001.60 2494.00
η
8.50 165.75 5.61 165.29 5.96 212.03 212.12 1060.26 1100.04 1430.58 155.79 8.42 154.98 9.10 201.51 201.69 949.11 982.15 2151.56
9.50 165.42 4.85 164.92 5.14 210.10 210.12 1052.59 1090.80 1333.48 155.11 6.82 154.15 7.32 200.82 200.86 939.02 967.94 1941.15
10.50 165.17 4.27 164.63 4.53 208.64 208.61 1046.60 1083.64 1261.93 154.64 5.73 153.60 6.13 200.35 200.31 931.00 957.31 1798.76

The effects of costs (c1 , c2 ) and greening investment coefficient (η) on the optimal decisions
of SC members for ML and RL decision structures are presented in Table 5. From Table 5, it is
seen that for ML and RL decision structures, the optimal wholesale and retail prices increase as
the purchasing costs (c1 , c2 ) are increased. The optimal greening level (q1∗ ) decreases and (q2∗ )
increases as the cost (c1 ) is increased. This diminishes the demand of the product-1 and raises
the demand for product-2. Thus, the profits of the manufacturer-1 and retailer decrease and the

Table 6: Effects of α, γ, θ1 and θ2 on the optimal decisions of SC members.

SC members’ competition
structures Manufacturers-leadership (ML) Retailer-leadership (RL)
parameters Optimal decisions Optimal objectives Optimal decisions Optimal objectives
∗ ∗ ∗ ∗
values w1 q1 w2 q2 p∗
1 p∗
2 π M1 π M2 πr ∗
w1 ∗
q1 ∗
w2 ∗
q2 p∗
1 p∗
2 π M1 π M2 πr
70.00 157.46 3.90 157.02 4.26 188.86 188.98 887.12 914.25 662.80 150.92 5.97 150.17 6.72 181.48 181.73 837.86 861.25 1010.57
80.00 165.87 5.89 165.43 6.25 212.73 212.85 1063.00 1103.36 1466.83 156.07 9.06 155.31 9.81 201.78 202.02 952.56 987.35 2235.79
α
90.00 174.28 7.88 173.83 8.24 236.59 236.71 1310.45 1364.04 2586.16 161.21 12.16 160.45 12.90 222.07 222.32 1114.47 1160.67 3941.49
100.0 182.69 9.87 182.24 10.24 260.46 260.58 1629.46 1696.28 4020.80 166.35 15.25 165.60 16.00 242.37 242.61 1323.59 1381.21 6127.67
110.0 191.10 11.86 190.65 12.23 284.32 284.44 2020.04 2100.09 5770.75 171.50 18.34 170.74 19.09 262.66 262.91 1579.94 1648.96 8794.34
0.50 162.43 1.98 161.67 2.10 198.42 198.06 1003.34 1033.53 864.59 151.24 2.07 149.85 2.19 196.95 196.57 878.87 894.81 1152.07
1.00 162.75 2.81 162.03 2.98 200.40 200.11 1012.32 1044.08 946.68 151.54 3.09 150.20 3.28 197.25 196.91 888.28 906.09 1269.55
γ
1.50 163.48 3.79 162.83 4.02 203.65 203.46 1026.27 1060.36 1077.43 152.35 4.51 151.10 4.81 198.07 197.82 904.13 925.21 1472.22
2.00 164.75 4.99 164.21 5.30 208.60 208.58 1046.66 1084.19 1284.51 154.10 6.80 153.07 7.30 199.82 199.78 930.04 957.44 1842.65
2.50 166.81 6.58 166.45 7.00 216.12 216.36 1076.08 1118.77 1624.56 158.12 11.33 157.74 12.40 203.84 204.45 970.24 1013.80 2645.34
0.55 149.78 2.08 149.31 2.44 162.35 162.48 789.04 803.81 149.32 146.09 3.06 145.36 3.82 159.48 159.75 773.12 786.05 246.00
0.60 156.11 3.58 155.65 3.94 179.91 180.03 865.58 890.34 464.29 149.97 5.39 149.22 6.15 174.47 174.72 821.77 843.28 740.51
θ1
0.65 162.97 5.20 162.52 5.57 202.09 202.21 994.19 1029.88 1087.51 154.24 7.96 153.48 8.71 193.02 193.27 906.34 937.17 1679.42
0.70 170.41 6.96 169.97 7.33 231.18 231.30 1187.79 1235.49 2236.02 158.96 10.80 158.19 11.55 216.79 217.03 1037.73 1078.76 3341.27
0.75 178.53 8.88 178.10 9.25 271.22 271.33 1462.79 1523.70 4320.87 164.21 13.96 163.43 14.70 248.71 248.93 1230.53 1282.79 6242.52
0.10 169.23 6.68 168.69 7.03 222.20 222.19 1153.31 1196.17 1870.36 164.86 14.35 163.85 14.94 210.57 210.56 1257.91 1300.87 3469.86
0.20 167.79 6.34 167.29 6.70 218.13 218.17 1113.18 1154.93 1691.04 160.41 11.67 159.48 12.32 206.12 206.20 1086.10 1124.42 2842.22
θ2
0.30 166.48 6.03 166.02 6.39 214.45 214.54 1078.56 1119.34 1536.34 157.30 9.80 156.48 10.51 203.01 203.19 987.05 1022.67 2406.95
0.40 165.29 5.75 164.86 6.12 211.08 211.23 1048.48 1088.44 1401.94 154.99 8.42 154.30 9.20 200.70 201.01 924.66 958.91 2087.38
0.50 164.19 5.49 163.81 5.87 208.01 208.21 1022.17 1061.43 1284.44 153.19 7.33 152.66 8.22 198.91 199.37 882.67 916.58 1842.81

profit of the manufacturer-2 is increased. Similarly, if the cost (c2 ) increases, then the profits of

19
the manufacturer-2 and retailer decrease and the profit of the manufacturer-1 is increased. Also,
at the optimal greening levels, wholesale and retail prices decrease as the greening investment
coefficient is increased. This decreases the optimal profits of the manufacturers and the retailer
because greening levels and prices balance the demands approximately but wholesale and retail
prices reduce the revenue. The profits of the manufacturers are highest (retailer is lowest) in
ML decision structure than the corresponding RL decision structure.
The effects of the parameters involved in the demand functions on the optimal decisions
of SC members for ML and RL decision structures are presented in Table 6. From Table 6,
it is observed that the optimal greening levels, wholesale and retail prices increase as the base
demand (α) increases and as a result, profits of the manufacturers and retailer are increased.
Also, the parameters γ and θ1 individually increase the optimal greening levels, wholesale and
retail prices and the profits of the manufacturers and retailer under both ML and RL structures.
But, the parameter θ2 decrease the optimal greening levels, wholesale and retail prices and the
profits of the manufacturers and retailer.

Table 7: Effects of a, b ce and λ on the optimal results of Govt.’s model under PCREP.
Govt. intervention in SC members’ competition
structures Manufacturers-leadership (ML) Retailer-leadership (RL)
parameters Optimal taxes Optimal objectives Optimal taxes Optimal objectives
values t∗
1 t∗2 Els GN R π M1 π M2 πr t∗
1 t∗
2 EIs GN R π M1 π M2 πr
100 42.72 43.79 2297.16 1084.63 880.49 892.50 601.12 36.63 37.56 3828.12 2639.59 853.24 866.40 1116.85
110 37.17 38.24 2503.10 1198.99 906.72 919.86 719.17 30.63 31.56 4152.29 2775.24 873.72 888.09 1331.37
a
120 31.61 32.69 2707.60 1291.46 935.45 949.57 847.91 24.63 25.56 4471.85 2869.76 896.04 911.62 1564.72
130 26.06 27.13 2910.45 1361.92 966.44 981.83 987.25 18.63 19.56 4786.79 2923.14 920.22 937.01 1816.91
140 20.51 21.58 3111.49 1410.35 999.87 1016.40 1137.05 12.63 13.56 5097.11 2935.38 946.25 964.24 2087.94
1.0 31.19 32.25 2723.35 1297.70 937.62 952.13 858.32 29.13 30.08 3828.12 2639.59 853.24 866.40 1116.85
1.1 31.40 32.46 2715.66 1294.66 936.48 950.95 853.23 27.53 28.47 4152.29 2775.24 873.72 888.09 1331.37
b
1.2 31.61 32.69 2707.60 1291.46 935.45 949.57 847.91 24.63 25.56 4471.85 2869.76 896.04 911.62 1564.72
1.3 31.84 32.92 2699.16 1288.06 934.21 948.28 842.37 19.33 20.24 4786.79 2923.14 920.22 937.01 1816.91
1.4 32.08 33.17 2690.17 1284.41 932.98 946.85 836.49 9.00 9.89 5097.11 2935.38 946.25 964.24 2087.94
0.65 43.00 44.05 2287.09 1078.50 879.15 891.36 595.65 40.53 41.46 3614.94 2529.35 840.93 853.30 987.52
0.70 37.30 38.36 2498.48 1196.65 906.03 919.29 716.39 33.12 34.05 4018.32 2723.94 865.00 878.86 1240.06
ce
0.75 31.61 32.69 2707.60 1291.46 935.45 949.57 847.91 24.63 25.56 4471.85 2869.76 896.04 911.62 1564.72
0.80 25.94 27.02 2914.63 1363.15 967.19 982.44 990.25 14.32 15.24 5010.43 2936.09 938.67 956.49 2009.93
0.85 20.28 21.38 3119.25 1411.79 1001.48 1017.51 1143.06 0.70 1.61 5700.92 2837.37 1003.37 1024.15 2683.33
0.2 21.16 22.27 3087.31 1405.67 996.06 1011.74 1118.40 14.65 15.63 4991.89 2935.85 937.57 954.33 1993.42
0.3 26.35 27.44 2899.54 1358.68 964.86 979.87 979.45 19.59 20.54 4736.20 2917.30 916.34 932.62 1774.85
λ
0.4 31.61 32.69 2707.60 1291.46 935.45 949.57 847.91 24.63 25.56 4471.85 2869.76 896.04 911.62 1564.72
0.5 36.97 38.02 2510.86 1202.88 907.62 921.08 723.85 29.79 30.68 4198.36 2791.29 876.54 891.62 1363.68
0.6 42.40 43.43 2309.82 1092.26 881.77 894.37 608.05 35.07 35.92 3914.98 2679.75 858.03 872.52 1172.25

The effects of the parameters a, b, ce and λ on the optimal results of Govt. and the profits
of SC members are presented in Table 7. The parameters a and ce individually decrease the
optimal taxes (t∗1 , t∗2 ) of the Govt. that raise the demands of the customers. This optimal
decision thus effectively increases the total environmental impacts (EIs), Govt. net revenue
(GNR) and the profits of the manufacturers and retailer. Similarly, the parameters b and λ
individually decreases the total environmental impacts, Govt. net revenue, the profits of the
manufacturers and the retailer. All the above studies in Table 7 are with respect to the Govt.
policy PCREP. Similar studies can be made for other Govt. policies also.

20
9 Conclusions
This investigation considers a real-life problem for sustainable development in SC man-
agement. Here, Govt.’s intervention on the decisions of the SC members is considered. The
environment-conscious Govt. tries to reduce environmental impacts and makes an effort to
generate some Govt. net revenue from the SC members. The Govt. encourages manufacturers
to produce greening products by contributing some subsidy for saved carbon or penalizes for an
extra amount of emissions as per trading price. The investigated SC consists of two competi-
tive manufacturers separately producing one of two substitutable greening products and selling
to a retailer by make-to-order business policy. The retailer sells to the customers against their
demands based on the selling prices, taxes and greening levels. We formulate a non-linear bi-
level interactive model between the Govt. and SC members under three Govt. policies and two
SC decision structures. In game theory framework, the SC problems are solved analytically
and then, the reduced problems for Govt. decisions are solved using standard non-linear solver
LINGO 14.0. Some effective decisions on the optimal results of Govt. and SC members for
different system parameters are presented. As the profits in different structures of different
scenarios depending on corresponding demand and marginal price, whoever is the leader in a
scenario, he/she dominates over other scenarios. Within the scenarios, the particular decision
structure which has the highest demand dominates over the others. Some useful managerial
insights are presented.
The model can be extended for other demand structures involving quality of the products,
promotional efforts, etc. Other govt. policies can be applied to control the environmental pollu-
tion. The model can be formulated with more SC members. Both substitute and complementary
items produced by the manufacturers can also be considered for the model.

References
Bai, Q., Chen, M., & Xu, L. (2017). Revenue and promotional cost-sharing contract versus
two-part tariff contract in coordinating sustainable supply chain systems with deteriorating
items. International Journal of Production Economics, 187, 85–101.
Bansal, S. (2008). Choice and design of regulatory instruments in the presence of green con-
sumers. Resource and Energy economics, 30(3), 345–368.
Bansal, S. & Gangopadhyay, S. (2003). Tax/subsidy policies in the presence of environmentally
aware consumers. Journal of Environmental Economics and Management, 45(2), 333–355.
Basiri, Z. & Heydari, J. (2017). A mathematical model for green supply chain coordination
with substitutable products. Journal of cleaner production, 145, 232–249.

21
Brécard, D. (2013). Environmental quality competition and taxation in the presence of green
network effect among consumers. Environmental and Resource Economics, 54(1), 1–19.
Choi, S. C. (1991). Price competition in a channel structure with a common retailer. Marketing
Science, 10(4), 271–296.
Conrad, K. (2005). Price competition and product differentiation when consumers care for the
environment. Environmental and Resource Economics, 31(1), 1–19.
Du, S., Ma, F., Fu, Z., Zhu, L., & Zhang, J. (2015). Game-theoretic analysis for an emission-
dependent supply chain in a cap-and-tradesystem. Annals of Operations Research, 228(1),
135–149.
Ghosh, D. & Shah, J. (2012). A comparative analysis of greening policies across supply chain
structures. International Journal of Production Economics, 135(2), 568–583.
Giri, B. & Bardhan, S. (2016). Coordinating a two-echelon supply chain with environmentally
aware consumers. International Journal of Management Science and Engineering Manage-
ment, 11(3), 178–185.
Giri, R. N., Mondal, S. K., & Maiti, M. (2016). Analysis of pricing decision for substitutable
and complementary products with a common retailer. Pacific Science Review A: Natural
Science and Engineering, 18(3), 190–202.
Giri, R. N., Mondal, S. K., & Maiti, M. (2017). Bundle pricing strategies for two complemen-
tary products with different channel powers. Annals of Operations Research, (pp. 1–25).
Hafezalkotob, A. (2015). Competition of two green and regular supply chains under envi-
ronmental protection and revenue seeking policies of government. Computers & Industrial
Engineering, 82, 103–114.
Hafezalkotob, A. (2017). Competition, cooperation, and coopetition of green supply chains
under regulations on energy saving levels. Transportation Research Part E: Logistics and
Transportation Review, 97, 228–250.
Hafezalkotob, A. (2018). Direct and indirect intervention schemas of government in the com-
petition between green and non-green supply chains. Journal of Cleaner Production, 170,
753–772.
Ji, J., Zhang, Z., & Yang, L. (2017a). Carbon emission reduction decisions in the retail-/dual-
channel supply chain with consumers’ preference. Journal of Cleaner Production, 141,
852–867.
Ji, J., Zhang, Z., & Yang, L. (2017b). Comparisons of initial carbon allowance allocation rules

22
 in an o2o retail supply chain with the cap-and-trade regulation. International Journal of
Production Economics, 187, 68–84.
Krass, D., Nedorezov, T., & Ovchinnikov, A. (2013). Environmental taxes and the choice of
green technology. Production and operations management, 22(5), 1035–1055.
Li, B., Zhu, M., Jiang, Y., & Li, Z. (2016). Pricing policies of a competitive dual-channel green
supply chain. Journal of Cleaner Production, 112, 2029–2042.
Liu, B., Li, T., & Tsai, S.-B. (2017). Low carbon strategy analysis of competing supply chains
with different power structures. Sustainability, 9(5), 835–856.
Liu, Z. L., Anderson, T. D., & Cruz, J. M. (2012). Consumer environmental awareness and
competition in two-stage supply chains. European Journal of Operational Research, 218(3),
602–613.
Madani, S. R. & Rasti-Barzoki, M. (2017). Sustainable supply chain management with pric-
ing, greening and governmental tariffs determining strategies: A game-theoretic approach.
Computers & Industrial Engineering, 105, 287–298.
Mahmoudi, R. & Rasti-Barzoki, M. (2018). Sustainable supply chains under government inter-
vention with a real-world case study: An evolutionary game theoretic approach. Computers
& Industrial Engineering, 116, 130–143.
Mainieri, T., Barnett, E. G., Valdero, T. R., Unipan, J. B., & Oskamp, S. (1997). Green buy-
ing: The influence of environmental concern on consumer behavior. The Journal of social
psychology, 137(2), 189–204.
Qi, Q., Wang, J., & Bai, Q. (2017). Pricing decision of a two-echelon supply chain with one
supplier and two retailers under a carbon cap regulation. Journal of Cleaner Production,
151, 286–302.
Qin, J., Ren, L., & Xia, L. (2017). Carbon emission reduction and pricing strategies of sup-
ply chain under various demand forecasting scenarios. Asia-Pacific Journal of Operational
Research, 34(1), 1740005.
Sheu, J.-B. & Chen, Y. J. (2012). Impact of government financial intervention on competition
among green supply chains. International Journal of Production Economics, 138(1), 201–
213.
Sinayi, M. & Rasti-Barzoki, M. (2018). A game theoretic approach for pricing, greening, and
social welfare policies in a supply chain with government intervention. Journal of Cleaner
Production.

23
Wei, J., Zhao, J., & Li, Y. (2013). Pricing decisions for complementary products with firms
different market powers. European Journal of Operational Research, 224(3), 507–519.
Xiao, Y., Yang, S., Zhang, L., & Kuo, Y.-H. (2016). Supply chain cooperation with price-
sensitive demand and environmental impacts. Sustainability, 8(8), 716–729.
Xu, X., He, P., Xu, H., & Zhang, Q. (2017). Supply chain coordination with green technology
under cap-and-trade regulation. International Journal of Production Economics, 183, 433–
442.
Xu, X., Xu, X., & He, P. (2016). Joint production and pricing decisions for multiple products
with cap-and-trade and carbon tax regulations. Journal of Cleaner Production, 112, 4093–
4106.
Yang, D. & Xiao, T. (2017). Pricing and green level decisions of a green supply chain with
governmental interventions under fuzzy uncertainties. Journal of Cleaner Production, 149,
1174–1187.
Yang, L., Zhang, Q., & Ji, J. (2017). Pricing and carbon emission reduction decisions in
supply chains with vertical and horizontal cooperation. International Journal of Production
Economics, 191, 286–297.
Yu, Y., Han, X., & Hu, G. (2016). Optimal production for manufacturers considering con-
sumer environmental awareness and green subsidies. International Journal of Production
Economics, 182, 397–408.
Zhang, L., Wang, J., & You, J. (2015). Consumer environmental awareness and channel coordi-
nation with two substitutable products. European Journal of Operational Research, 241(1),
63–73.
Zhang, Y. H. & Wang, Y. (2017). The impact of government incentive on the two competing
supply chains under the perspective of corporation social responsibility: A case study of
photovoltaic industry. Journal of Cleaner Production, 154, 102–113.
Zhao, J., Wei, J., & Li, Y. (2014). Pricing decisions for substitutable products in a two-echelon
supply chain with firms different channel powers. International Journal of Production Eco-
nomics, 153, 243–252.

24
Appendix A
Proof of Proposition 1 (i) and (ii): The 1st and 2nd order partial differentiation w. r. to p1 and p2
of the retailer’s profit function given in Eq. (3) are as follows:
∂πr ∂πr
∂p1
= −(p1 − w1 ) + θ1 (p2 − w2 ) + D1 (p, q, t), ∂p2
= θ1 (p1 − w1 ) − (p2 − w2 ) + D2 (p, q, t),
∂ 2 πr ∂ 2 πr ∂2π M1 ∂ 2 πr
∂p21
= −2, ∂p2 ∂p1
= 2θ1 = ∂p1 ∂p2
and ∂p22
= −2
 
−2 2θ1
The Hessian matrix of the retailer’s profit function, H is   and its determinate value |H| =
2θ1 −2
4(1 − θ12 ) > 0 as 0 < θ1 < 1. Therefore, the profit function of the retailer is concave.
At extreme point, we have

− (p∗1 − w1 ) + θ1 (p∗2 − w2 ) + D1 (p∗ , q, t) = 0 (A.1)

θ1 (p∗1 − w1 ) − (p∗2 − w2 ) + D2 (p∗ , q, t) = 0 (A.2)

Solving Eqs. (A.1) and (A.2), we have

(w1 − t1 ) (1 + θ1 )α + γ(1 − θ1 θ2 )q1 + γ(θ1 − θ2 )q2

p∗1 = + (A.3)
2 2(1 − θ12 )
(w2 − t2 ) (1 + θ1 )α + γ(1 − θ1 θ2 )q2 + γ(θ1 − θ2 )q1
p∗2 = + (A.4)
2 2(1 − θ12 )

Appendix B
Proof of Proposition 1 (iii) and (iv): The 1st and 2nd order partial differentiation w. r. to
w1 and q1 of the manufacturer M1 ’s profit function given in Eq. (1) are as follows:
∂πM1
∂w1
= 12 [−w1 − bce q1 + c1 + ace + α − (w1 + t1 ) + θ1 (w2 + t2 ) + γ(q1 − θ2 q2 )],
∂πM1
∂q1
= 12 [γ{w1 + bce q1 − c1 − ace } + bce {α − (w1 + t1 ) + θ1 (w2 + t2 ) + γ(q1 − θ2 q2 )} − 2ηq1 ],
∂ 2 πM1 ∂ 2 πM1 1 ∂ 2 πM1 ∂ 2 πM1
∂w12 = −1, ∂w1 ∂q1
= 2
(γ − bc e ) = ∂q1 ∂w1
and ∂q12
= γbce − η.
 
γ−bce
−1 2
The Hessian matrix of the manufacturer M1 ’s profit function, H is   and
γ−bce
2
γbce − η
4η−(γ+bce )2
its determinate value |H| = 4
> 0, if 4η > (γ + bce )2 . Therefore, the profit function
of the manufacturer M1 is concave if 4η > (γ + bce )2 .

25
At extreme point, we have the optimal response function of the manufacturer M1 as follows:

− 2w1∗ + (γ − bce )q1∗ = −c1 − ace − α + t1 − θ1 (w2 + t2 ) + θ2 γq2 (B.1)

(γ − bce )w1∗ + 2(γbce − η)q1∗ = γ(c1 + ace ) − bce {α − t1 + θ1 (w2 + t2 ) − θ2 γq2 } (B.2)

Similarly, we have the profit function of the manufacturer M2 is concave if 4η > (γ + bce )2 .
At extreme point, we have the optimal response function of the manufacturer M2 as follows:

− 2w2∗ + (γ − bce )q2∗ = −c2 − ace − α + t2 − θ1 (w1 + t1 ) + θ2 γq1 (B.3)

(γ − bce )w2∗ + 2(γbce − η)q2∗ = γ(c2 + ace ) − bce {α − t2 + θ1 (w1 + t1 ) − θ2 γq1 } (B.4)

Solving the Eqs. (B.1), (B.2), (B.3) and (B.4), we have the Nash-equilibrium decisions on
wholesale prices and greening levels of the manufacturers, which are given as follows:

w1∗ = [ace {2η − γ(1 − θ2 )A1 } + (2η − bce A1 )α]/{2η(2 − θ1 ) − A1 (A1 − A2 )}

+[(2η − bce A1 ){2η(2 − θ12 ) − A1 (A1 − θ1 A2 )}t1 + {2ηA1 (A1 − A4 ) − γA31 (A1 − θ2 A2 ) − 8η 2 }c1 (B.5)
−(2η − bce A1 )(2ηθ1 − A1 A3 )(c2 + t2 )]/[{2η(2 − θ1 ) − A1 (A1 − A2 )}{A1 (A1 + A2 ) − 2η(2 + θ1 )}]

q1∗ = [A1 {α − ace (1 − θ1 )}]/[2η(2 − θ1 ) − A1 (A1 − A2 )] + [A1 {2η(2 − θ12 ) − A1 (A1 − θ1 A2 )}(c1 + t1 )
(B.6)
+A1 (A1 A3 − 2ηθ1 )(c2 + t2 )]/[{2η(2 − θ1 ) − A1 (A1 − A2 )}{A1 (A1 + A2 ) − 2η(2 + θ1 )}]

w2∗ = [ace {2η − γ(1 − θ2 )A1 } + (2η − bce A1 )α]/{2η(2 − θ1 ) − A1 (A1 − A2 )}

+[(2η − bce A1 ){2η(2 − θ12 ) − A1 (A1 − θ1 A2 )}t2 + {2ηA1 (A1 − A4 ) − γA31 (A1 − θ2 A2 ) − 8η 2 }c2 (B.7)
−(2η − bce A1 )(2ηθ1 − A1 A3 )(c1 + t1 )]/[{2η(2 − θ1 ) − A1 (A1 − A2 )}{A1 (A1 + A2 ) − 2η(2 + θ1 )}]

q2∗ = [A1 {α − ace (1 − θ1 )}]/[2η(2 − θ1 ) − A1 (A1 − A2 )] + [A1 {2η(2 − θ12 ) − A1 (A1 − θ1 A2 )}(c2 + t2 )
(B.8)
+A1 (A1 A3 − 2ηθ1 )(c1 + t1 )]/[{2η(2 − θ1 ) − A1 (A1 − A2 )}{A1 (A1 + A2 ) − 2η(2 + θ1 )}]

where expressions of Ai , (i = 1, 2, 3, 4) are given in Table C.1.

Appendix C
Proof of Proposition 3 (i) and (ii): The 1st and 2nd order partial differentiation w. r. to w1 and q1
of the manufacturer M1 ’s profit function given in Eq. (1) are as follows:

26
 ∂πM1
∂w1
= −w1 − bce q1 + c1 + ace + α − (w1 + t1 ) + θ1 (w2 + t2 ) + γ(q1 − θ2 q2 ),
∂πM1
∂q1
= γ{w1 + bce q1 − c1 − ace } + bce {α − (w1 + t1 ) + θ1 (w2 + t2 ) + γ(q1 − θ2 q2 )} − ηq1 ,
∂ 2 πM1 ∂ 2 πM1 ∂ 2 πM1 ∂2π
∂w12
= −2, ∂w1 ∂q 1
= (γ − bce ) = ∂q1 ∂w1
and ∂qM2 1 = 2γbce − η.
1  
−2 γ − bce
The Hessian matrix of the manufacturer M1 ’s profit function, H is  
γ − bce 2γbce − η
and its determinate value |H| = 2η − (γ + bce )2 > 0, if 2η > (γ + bce )2 . Therefore, the profit
function of the manufacturer M1 is concave if 2η > (γ + bce )2 .
At extreme point, we have the optimal response function of the manufacturer M1 as follows:

− 2w1∗ + (γ − bce )q1∗ = −c1 − ace − α + t1 − θ1 (w2 + t2 ) + θ2 γq2 (C.1)

(γ − bce )w1∗ + 2(γbce − η)q1∗ = γ(c1 + ace ) − bce {α − t1 + θ1 (w2 + t2 ) − θ2 γq2 } (C.2)

Similarly, we have the profit function of the manufacturer M2 is concave if 2η > (γ + bce )2 .
At extreme point, we have the optimal response function of the manufacturer M2 as follows:

− 2w2∗ + (γ − bce )q2∗ = −c2 − ace − α + t2 − θ1 (w1 + t1 ) + θ2 γq1 (C.3)

(γ − bce )w2∗ + 2(γbce − η)q2∗ = γ(c2 + ace ) − bce {α − t2 + θ1 (w1 + t1 ) − θ2 γq1 } (C.4)

Solving the Eqs. (C.1), (C.2), (C.3) and (C.4), we have the Nash-equilibrium decisions on
wholesale prices and greening levels of the manufacturers, which are given as follows:

A9
w1∗ = c1 + ace + {A6 α − A7 (p1 + t1 ) + A8 (p2 + t2 )} (C.5)
A5 A6
A1
q1∗ = {A6 α − A7 (p1 + t1 ) + A8 (p2 + t2 )} (C.6)
A5 A6
A9
w2∗ = c2 + ace + {A6 α − A7 (p2 + t2 ) + A8 (p1 + t1 )} (C.7)
A5 A6
A1
q2∗ = {A6 α − A7 (p2 + t2 ) + A8 (p1 + t1 )} (C.8)
A5 A6

where expressions of Ai , (i = 1, 5, 6, 7, 8, 9) are given in Table C.1.

Table C.1: Expressions of Ai , i = 1 (1) 12.

A1 = γ + bce , A2 = θ2 γ + θ1 bce , A3 = γ(θ1 − θ2 ), A4 = γ(2 − θ1 θ2 ), A5 = η − γ(1 − θ2 )A1 ,

A6 = η − γ(1 + θ2 )A1 , A7 = η − γ(1 − θ1 θ2 )A1 , A8 = θ1 η − A1 A3 , A9 = η − bce A1 ,
A10 = γ + 2bce , A11 = θ2 γ + 2θ1 bce and A12 = γ(3θ1 θ2 − 5) + bce (4θ12 − 7).

27
Appendix D
Proof of Proposition 3 (iii) and (iv): Substitute the values of w1∗ , q1∗ , w2∗ and q2∗ given in Eqs.
(C.5), (C.6), (C.7) and (C.8) into Eq. (3) and partially differentiation w. r. to p1 and p2 . Now,
we obtain the determinate value of the Hessian matrix as

η 2 (1 − θ12 )A41 {A1 (A1 + A2 ) − η(2 + θ1 )}{A1 (A1 − A2 ) − η(2 − θ1 )}

|H| =
4(A21 − A22 )2

Therefore, the retailer’s profit function is concave if η(2 + θ1 ) > A1 (A1 + A2 ) and η(2 − θ1 ) >
A1 (A1 − A2 ) and the optimal selling prices are

p∗1 = [ace (1 − θ1 )A5 + {η(3 − 2θ1 ) − A1 (A10 − A11 )}α]/[2(1 − θ1 ){A1 (A1 − A2 ) + η(2 − θ1 )}]

+[{A21 (A1 A10 − A2 A11 ) + ηA1 A12 + 2η 2 (3 − θ12 )}t1 − {γ(A1 − θ2 A2 ) − ηA1 (A1 + A4 ) + 2η 2 }c1(D.1)

−A8 A9 (c2 + t2 )]/[{2{A1 (A1 + A2 ) − η(2 + θ1 )}{A1 (A1 − A2 ) − η(2 − θ1 )}]

p∗2 = [ace (1 − θ1 )A5 + {η(3 − 2θ1 ) − A1 (A10 − A11 )}α]/[2(1 − θ1 ){A1 (A1 − A2 ) + η(2 − θ1 )}]

+[{A21 (A1 A10 − A2 A11 ) + ηA1 A12 + 2η 2 (3 − θ12 )}t2 − {γ(A1 − θ2 A2 ) − ηA1 (A1 + A4 ) + 2η 2 }c2(D.2)

−A8 A9 (c1 + t1 )]/[{2{A1 (A1 + A2 ) − η(2 + θ1 )}{A1 (A1 − A2 ) − η(2 − θ1 )}]

where expressions of Ai , (i = 1, 2, 4, 5, 8, 9, 10, 11, 12) are given in Table C.1.

Appendix E
Proof of Proposition 5 (i) and (ii): The 1st and 2nd order partial differentiation w. r. to
p1 , p2 , q1 and q2 of the SC profit function given in Eq. (4) are as follows:
∂πc
∂p1
= −2p1 + 2θ1 p2 + (γ − bce )q1 − (θ2 γ − θ1 bce )q2 + α + (c1 − t1 ) − θ1 (c2 − t2 ) + (1 − θ1 )ace ;
∂πc
∂p2
= 2θ1 p1 − 2p2 − (θ2 γ − θ1 bce )q1 + (γ − bce )q2 + α − θ1 (c1 − t1 ) + (c2 − t2 ) + (1 − θ1 )ace ;
∂πc
∂q1
= (γ − bce )p1 − (θ2 γ − θ1 bce )p2 + (2γbce − η)q1 − 2θ2 γbce q2 + bce (α − t1 + θ1 t2 )
∂πc
−γ(c1 − θ2 c2 ) − ace γ(1 − θ2 ); ∂q2
= −(θ2 γ − θ1 bce )p1 + (γ − bce )p2 − 2θ2 γbce q1
∂ 2 πc ∂ 2 πc
+(2γbce − η)q2 + bce (α + θ1 t1 − t2 ) − γ(c2 − θ2 c1 ) − ace γ(1 − θ2 ); ∂p21
= ∂p22
= −2;
∂ 2 πc ∂ 2 πc ∂ 2 πc ∂ 2 πc ∂ 2 πc ∂ 2 πc
∂p1 ∂p2
= ∂p2 ∂p1
= 2θ1 ; ∂p1 ∂q1
= ∂p2 ∂q2
= ∂q1 ∂p1
= ∂q2 ∂p2
= (γ − bce );
∂2π ∂2π ∂2π ∂2π ∂2π ∂ 2 πc
∂p1 ∂q2
c
= ∂p2 ∂q1
c
= ∂q2 ∂p1
c
= ∂q1 ∂p2
c
= −(θ2 γ − θ1 bce ); ∂q12
c
= ∂q22
= (2γbce − η);
∂ 2 πc ∂ 2 πc
∂q1 ∂q2
= ∂q2 ∂q1
= −2θ2 γbce .

28
  
−2 2θ1 γ − bce θ1 bce − θ2 γ
 
−2 θ1 bce − θ2 γ γ − bce
 
 2θ1 
The Hessian matrix, H is  
γ − bce θ1 bce − θ2 γ 2γbce − η −2θ2 γbce
 
 
 
θ1 bce − θ2 γ γ − bce −2θ2 γbce 2γbce − η
The matrix H is positive definite if θ1 < 1; γ (θ1 − θ2 ) < (1 − θ1 ){2η − (γ + bce )2 }; {(1 −
2 2 2

θ2 )γ + (1 − θ1 )bce }2 > 2(1 − θ1 )η and {(1 + θ2 )γ + (1 + θ1 )bce }2 > 2(1 + θ1 )η. Therefore,
the profit expression given in Eq. (4) is concave subject to the above inequalities hold.
At extreme point, we have

−2p∗1 + 2θ1 p∗2 + (γ − bce )q1∗ − (θ2 γ − θ1 bce )q2∗ = k1

2θ1 p∗1 − 2p∗2 − (θ2 γ − θ1 bce )q1∗ + (γ − bce )q2∗ = k2
(E.1)
(γ − bce )p∗1 − (θ2 γ − θ1 bce )p∗2 + (2γbce − η)q1∗ − 2θ2 γbce q2∗ = k3
−(θ2 γ − θ1 bce )p∗1 + (γ − bce )p∗2 − 2θ2 γbce q1∗ + (2γbce − η)q2∗ = k4

where k1 = −α − (c1 − t1 ) + θ1 (c2 − t2 ) − (1 − θ1 )ace ; k2 = −α + θ1 (c1 − t1 ) − (c2 − t2 ) −

(1 − θ1 )ace ; k3 = −bce (α − t1 + θ1 t2 ) + γ(c1 − θ2 c2 ) + ace γ(1 − θ2 ) and k4 = −bce (α + θ1 t1 −
t2 ) + γ(c2 − θ2 c1 ) + ace γ(1 − θ2 ).
Solving the system of linear Eqs. given in (E.1), we have

p∗1 = (B1 k1 + B2 k2 + B3 k3 + B4 k4 )/B (E.2)

p∗2 = (B2 k1 + B1 k2 + B4 k3 + B3 k4 )/B (E.3)

q1∗ = (B3 k1 + B4 k2 + B5 k3 + B6 k4 )/B (E.4)

q2∗ = (B4 k1 + B3 k2 + B6 k3 + B5 k4 )/B (E.5)

where B = [{(1 − θ2 )γ + (1 − θ1 )bce }2 − 2(1 − θ1 )η][2(1 + θ1 )η − {(1 + θ2 )γ + (1 + θ1 )bce }2 ];

B1 = 2bce γ(1−θ22 )(γ +bce )2 +2b3 c3e γ(θ1 −θ2 )2 +η(2η−4bce γ)−η(γ +bce )2 −η(θ2 γ −θ1 bce )2 ;
B2 = 2η(θ1 η − θ2 γ 2 ) + 2b3 c3e γ(2θ1 − θ2 − θ12 θ2 ) − 2b2 c2e ηθ1 + 4b2 c2e γ 2 (1 − θ22 )θ1 − 2bce γη(3θ1 −
θ2 ) + 2bce γ 3 (1 − θ22 )θ2 ; B3 = b3 c3e (1 − θ12 ) + b2 c2e γ(1 − 3θ12 + 2θ1 θ2 ) + 2γη(1 − θ1 θ2 ) −
γ 3 (1 − θ22 ) − 2bce η(1 − θ12 ) − bce γ 2 (1 + 2θ1 θ2 − 3θ22 ); B4 = b3 c3e (1 − θ12 )θ1 + 2γη(θ1 − θ2 ) −
b2 c2e γ(2θ1 − 3θ2 + θ12 θ2 ) − γ 3 (1 − θ22 )θ2 + bce γ 2 (2θ2 − 3θ1 + θ1 θ22 ); B5 = 4η(1 − θ12 ) − 2(1 −
θ12 )(γ + bce )2 − 2γ 2 (θ1 − θ2 )2 ; B6 = 2γ 2 (θ1 − 2θ2 + θ1 θ22 ) − 4bce γ(1 − θ12 )θ2 − 2b2 c2e (1 − θ12 )θ1 .

29
Appendix F
The idea of Stackelberg equilibrium was built up by von Stackelberg (1934) in oligopoly
model. Stackelberg equilibrium expects a sequential choice process with two phases. Ac-
cordingly, it permits to incorporate various leveled structure between interest players, which is
utilized to show channel leadership with regards to supply chain management. Subsequently,
the player who can move initially is called Stackelberg leader (or just leader), while the second
player has named Stackelberg follower (or follower). Once more, Stackelberg game is played
under perfect information, where the follower thinks about the system picked by the leader in
the principal stage and tries to maximize his utility in the second phase of the game, given the
leader’s activity.
Mathematically, the balance of a Stackelberg game can be distinguished by means of back-
ward induction: at first needs to decide the best reaction functions rp (sp0 ) of the follower (p) on
the strategies of the leader (sp0 ). As this function is known to the leader because of the supposi-
tion of complete information, it shapes a limitation of the advancement issue of the leader. By
solving the resulting optimization problem, the optimal strategy of the leader is found. From
that point onward, the follower’s best reaction on this system prompts the strategies chosen by
the follower. Since both strategies lie upon the players’ best response functions, no one has an
incentive to deviate from his strategy and the Stackelberg equilibrium is found.
Again, let us illustrate the two firms game, G = ({1, 2}, [xl1 , xr1 ] × [xl2 , xr2 ], {π1 , π2 }) for
Stackelberg equilibrium. Without loss of generality, firm-1 plays as leader and firm-2 plays as
follower of the game G. Mathematically, formulate leader-follower game as


 max π1 (x1 , x∗2 (x1 ))
x1




 s. t. x ∈ S and x∗ (x ) is obtained from solving the probblem

1 1 2 1


  max π2 (x1 , x2 )
x2





  s. t. x ∈ S
2 2

Using backward induction method, first firm-2 establishes the rational reaction function
∂π2 (x1 ,x2 )
x∗2 = r2 (x1 ) from the necessary condition ∂x2
= 0. The rational reaction x∗2 = r2 (x1 ) is
formed the firm-1 optimization problem. Solving this optimization problem determine optimal
strategy (x∗1 = r1 (x∗2 )) of firm-1. Finally, after knowing leader’s optimal strategy (x∗1 ), fol-
lower evaluates his optimal strategy x∗2 as x∗2 = r2 (x∗1 ). The flow chart to find the Stackelberg

30
equilibrium are presented in Fig. 12.

Insert Fig. 12: Determination of Stackelberg equilibrium.

Fig. 1: Govt. intervention in green SC

Fig. 2: Surface of EIs(t1 , t2 ).

31
 Fig. 3: Surface of GN R(t1 , t2 ) with contour.

Fig. 4: Surface of GN R(t1 , t2 ) − 0.2EIs(t1 , t2 ) with contour.

32
 SC members’ competition
-
& cooperation
ML RL CD
Govt. policies
PCP Scenario-1a Scenario-1b Scenario-1c

REP Scenario-2a Scenario-2b Scenario-2c

PCREP ? Scenario-3a Scenario-3b Scenario-3c

Fig. 5: Different scenarios of Govt. intervention in SC members

Fig. 6: Feasible region of scenario-1a.

33
 Fig. 7: Feasible region of scenario-2a.

Fig. 8: Feasible region of scenario-3a for different objective values

34
 Fig. 9: Feasible region of scenario-3a for different weights

Fig. 10: Tax (t1 ) vs profit of SC members under ML and RL structures.

Fig. 11: Tax (t2 ) vs profit of SC members under ML and RL structures.

35
Fig. 12: Determination of Stackelberg equilibrium

36
*Highlights (for review)

 Two manufacturers and a common retailer system for two substitute items is considered
 Items’ demands depend on prices, greening levels (environmental impacts) and taxes
 Govt. controls pollution intervening the supply chain under cap-and-trade policy
 Manufacturers are subsidized (penalized) for less (more) carbon emission
 Under nine cases, maximum profits and minimum environmental impacts are obtained