Energy Efficiency Contracting in Supply Chains under Asymmetric Bargaining Power

45 Pages Posted: 14 Sep 2015 Last revised: 27 Jul 2018

See all articles by Ali Shantia

Ali Shantia

HEC Paris - Operations Management and Information Technology; LUISS Guido Carli University - Department of Business and Management

Sam Aflaki

HEC Paris - Operations Management and Information Technology

Andrea Masini

HEC Paris - Operations Management and Information Technology

Date Written: July 27, 2018

Abstract

Evidence shows that suppliers refrain from investing in energy efficiency (EE) measures because they fear that a buyer with greater bargaining power will use EE-related cost reductions to push prices down---in the purchase bargaining process---and thereby further reduce the supplier's profit margin; this dynamic leads to inefficient levels of investment in EE due to the so-called holdup problem. Suppliers are also discouraged from EE investment by the uncertainty associated with new technologies. These two issues are studied via our model of the bargaining process, in a two-tier supply chain, between a single supplier and buyer; we analyze how the supplier's EE investment is affected by the buyer's relative bargaining power and also by technology uncertainty. We compare various contracting arrangements commonly used in industry to overcome these obstacles, including price commitment by the buyer and shared investment contracts, while characterizing their optimal properties with respect to different criteria---in particular, supply chain profit and the equilibrium level of EE investment. In terms of both criteria, we find that shared investment contracts perform better than price commitment contracts, although the latter increase supplier profit when the buyer's bargaining power is relatively high. We also show that, in a two-player model, technology uncertainty moderates how the bargaining process affects the supplier's investment behavior.

Keywords: supply chain coordination, renegotiation, relative bargaining power, technology uncertainty

Suggested Citation

Shantia, Ali and Aflaki, Sam and Masini, Andrea, Energy Efficiency Contracting in Supply Chains under Asymmetric Bargaining Power (July 27, 2018). HEC Paris Research Paper No. MOSI-2015-1106. Available at SSRN: https://ssrn.com/abstract=2660055 or http://dx.doi.org/10.2139/ssrn.2660055

Ali Shantia

HEC Paris - Operations Management and Information Technology ( email )

1, rue de la Liberation
Jouy en Josas, 78351
France

LUISS Guido Carli University - Department of Business and Management ( email )

Via Salvini, 3
Rome, 00198
Italy

Sam Aflaki (Contact Author)

HEC Paris - Operations Management and Information Technology ( email )

1, rue de la Liberation
Jouy en Josas, 78351
France

Andrea Masini

HEC Paris - Operations Management and Information Technology ( email )

1, rue de la Liberation
Jouy en Josas, 78351
France

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