Greening the supply chain

Research in the International Journal of Environment and Pollution has looked at carbon-reduction strategies across supply chains. The findings suggest that uncertainty in consumer demand need not preclude environmental gains.

The team looked at a four-stage supply chain, encompassing suppliers, producers, retailers, and consumers. They used a structured economic model, the Stackelberg game, to examine the dominant “actor”, in this case the manufacturer. The dominant actor makes the initial decisions, and the other players adjust their behaviour accordingly. Such a sequential decision-making framework models the way many industries function, where firms exert influence over pricing and production conditions downstream.

In contrast to other studies that have isolated individual parts of the supply chain, this latest study adopts a system-wide perspective. In it, retailers are not merely intermediaries but are active participants shaping demand. As such, retailers then influence consumer behaviour through pricing strategies and promotional efforts, such as emphasising low-carbon products or highlighting environmental credentials. This affects consumer decisions about the price of “greener” goods, and this then feeds back into the incentives at the manufacturer level for reducing emissions and pollution earlier in production.

The challenge in green manufacturing is demand uncertainty. Firms somehow need to be able to predict how positively consumers would respond to those greener, low-carbon products. This uncertainty complicates investment decisions. The research indicates that supply chain participants can still achieve what economists term Pareto improvements, where at least one party benefits without leaving others worse off, through coordinated adjustments in pricing, subsidies and emission reduction efforts.

The results reveal a set of trade-offs. Subsidies aimed at boosting retail promotion tend to increase marketing efforts and allow retailers to charge higher prices, reflecting stronger consumer demand for environmentally friendly products. However, these same measures weaken the producers’ incentives to invest in their own emission reductions and may lead to higher wholesale prices. The overall effect, however, is emission reduction across the supply chain, suggesting that policies or strategies that appear inefficient at the manufacturer level may still deliver environmental benefits.

Shen, Q. and Hou, X. (2026) ‘Carbon reduction coordination and pricing strategy of a four-level supply chain under demand uncertainty’, Int. J. Environment and Pollution, Vol. 76, No. 5, pp.36–57.