Reward-Penalty Mechanism or Subsidy Mechanism: A Closed-Loop Supply Chain Perspective

Abstract

The government plays a crucial role in regulating the closed-loop supply chain (CLSC). We investigated the reward-penalty mechanism (RPM) for the manufacturer and the subsidy mechanism (SM) for the collector in CLSCs. The government’s goal is to maximize social welfare. Based on the centralized and decentralized decision-making models without government intervention, we developed two CLSC models where the government rewards or penalizes the manufacturer and subsidizes the collector. Then, the impact of government input cost and environmental benefit coefficients on the decision variable, firm’s profit and social welfare was analyzed. We found the following conclusions: (i) both RPM and SM increase the collection rate and the profit of CLSC partners, while the price of a new product decreases if the environmental benefit coefficient is moderate; (ii) social welfare and the profits of the manufacturer and retailer under RPM are higher than under SM, while a collector’s profit under RPM is lower than that under SM; (iii) RPM is more feasible to implement in terms of the higher collection rate, buyback price and social welfare. These conclusions could provide several managerial implications for both the government and partners of the CLSC.

Keywords

• reward-penalty mechanism
• subsidy mechanism
• closed-loop supply chain
• social welfare