Investing in a shared supplier to encourage environmental responsibility under spillovers and demand uncertainty

In this paper, we investigate the issue of whether two competing manufacturers should make environmental quality investments in a shared supplier under spillovers and demand uncertainty. To this end, we develop game-theoretic models and analyze the equilibrium outcomes in cases with no investment, unilateral investment, and bilateral investment. The results show that if the manufacturers are less (more) risk-averse, both (none) of them invest(s). If one manufacturer is less risk-averse and the other is more risk-averse, they act as the unique investor and free-rider, respectively. If both are moderately risk-averse, there are thresholds below which a manufacturer invests; otherwise, they jointly invest or exit. Moreover, any manufacturer may suffer from the competitor’s investment despite the existence of spillovers. In some cases, the bilateral investment is detrimental to the supplier and may yield a win–win, win–lose, lose–win, or lose–lose outcome for the manufacturers. Our sensitivity analysis indicates that, under medium risk aversion, the optimal investment strategies are synchronous if the intensity of spillovers (product substitutability) is high (low); and they are asynchronous otherwise. In general, increased demand uncertainty or customers’ environmental sensitivity strengthens the incentives for the manufacturers to invest in the shared supplier. Our key findings remain valid under asymmetric spillovers, Bertrand competition, investment cost-sharing, etc.