The impact of government subsidy on supply Chains’ sustainability innovation

Motivated by recently observed industry and government practices, in this paper we endogenize government subsidy in a research joint venture (RJV). In particular, we present a three-player game in which a government determines the amount of subsidy for a supply chain consisting of a manufacturer and a retailer conducting an RJV on a sustainable product. In addition to the retail and wholesale pricing decisions, the firms must determine the level of innovation effort as well as the division of innovation costs between the partners. In our analysis we consider two forms of RJV formation (retailer and manufacturer initiated) and two types of subsidy (per-unit production subsidy and innovation effort subsidy). We find that: (a) the government should never use both types of subsidies simultaneously for any cost-reduction research and development (R&D) effort, (b) whenever effort subsidy is present the government is indifferent as to how the RJV is formed, and (c) even though firms benefit most from initiating the RJV in many cases, the manufacturer is worse off by initiating the RJV if R&D effort increases per-unit production cost, innovation or production cost is high and only per-unit production subsidy is present.