The Impact of Government Subsidies and Retailer Contracts on Product Recovery

Conducting product recovery and remanufacturing not only help manufacturers decrease the unit cost of production, but also benefit the environment. However, most manufacturers are hampered by the huge initial investment of related operations. In order to alleviate the manufacturers’ financial pressure of product recovery and remanufacturing, some governments implement the production subsidy (subsidy [Formula: see text]) and recycling subsidy (subsidy [Formula: see text]). Meanwhile, retailers can provide the revenue-sharing contract (contract [Formula: see text]) and cost-sharing contract (contract [Formula: see text]). Hence, this paper mainly studies the incentive designs of the government and retailer, and the effects of these incentives on the closed-loop supply chain. We first establish a Stackelberg game model consisting of a government, a manufacturer and a retailer, then investigate and compare the optimal decisions and payoffs of each member under each incentive combination of the government and retailer. Our results first show that, on the other hand, the government’s subsidy type cannot affect the retailer’s design of contract [Formula: see text], but subsidy [Formula: see text] can induce the retailer to share a higher rate of sale revenue, comparing to subsidy [Formula: see text]. On the other hand, the retailer’s contract [Formula: see text] could induce the government to increase subsidy rate in most cases, comparing to contract [Formula: see text]. Second, the subsidy [Formula: see text] can always lead to a higher collection rate, lower wholesale and retail prices, and higher payoffs for the government, manufacturer and retailer, comparing to subsidy [Formula: see text]. Besides, under subsidy [Formula: see text], contract [Formula: see text] always leads to a higher collection rate, lower wholesale and retail prices, and higher payoffs for the government, manufacturer and retailer, comparing to contract [Formula: see text]. However, under subsidy [Formula: see text], contract [Formula: see text] can lead to a higher collection rate, a lower wholesale price, and higher payoffs for the manufacturer and retailer, comparing to contract [Formula: see text] only when the manufacturer’s recovery efficiency is high. Moreover, the retail price is always higher and the government payoffs is always lower under contract [Formula: see text]. Third, the government prefers to implement the subsidy [Formula: see text] and then which contract is chosen by the retailer depends on the collection efficiency of the manufacturer. Therefore, subsidy [Formula: see text] combining with contract [Formula: see text] or [Formula: see text] is the equilibrium incentive combination.