The value of advance payment financing to carbon emission reduction and production in a supply chain with game theory analysis

This paper investigates the value of advance payment financing to carbon emission reduction and production in a supply chain. We discuss two models, namely, (1) a supply chain model with a manufacturer that is not capital-constrained, under the conditions of being with and without advance payment financing, and (2) a supply chain model with a capital-constrained manufacturer, under the conditions of using bank financing and mixed financing. We characterize and compare the optimal solutions in the two supply chain models and then extend the models with cap-and-trade regulation and general stochastic demand. We find that in the supply chain model without a capital-constrained manufacturer, advance payment financing with a low-price discount can increase the supply chain partners’ profits. However, in the supply chain model with a capital-constrained manufacturer, when the manufacturer’s production cost is high, mixed financing with a low-price discount can improve both partners’ profits. Furthermore, in the model with a capital-constrained manufacturer, when the manufacturer’s carbon emission reduction efficiency is high, the use of mixed financing can encourage the manufacturer to increase carbon emission reductions. The results help the manufacturer and the retailer to decide whether to join in advance payment financing.