Optimal Decisions and Government Subsidies with Fairness Concerns and Power Structure in a Closed-loop Supply Chain

This paper examines how manufacturers’ fairness concerns and government subsidies affect carbon emission mitigation and operational performance in a closed-loop supply chain. To analyze the effect of power asymmetry, we develop game-theoretic models under three typical supply chain power structures: Manufacturer-led Stackelberg (MS), Retailer-led Stackelberg (RS) and Vertical Nash (VN). Several key findings emerge from the equilibrium analysis. First, optimal emission reduction is achieved in the VN mode under low fairness concerns and in the RS mode under high subsidies. Second, the power structure critically determines the optimal subsidy: higher subsidies are warranted in RS mode, as retailer dominance dampens the manufacturer’s voluntary investment, whereas lower subsidies suffice in MS mode, where manufacturer leadership incentivizes greater investment. Finally, contrary to conventional expectations, a manufacturer’s fairness concerns do not invariably improve its profits. Under MS mode, strong fairness concerns can reduce profits by distorting pricing and investment decisions, as the manufacturer may prioritize equitable distribution over economic optimality. This study offers insights into the interplay of power structures, behavioral preferences, and environmental policies in sustainable closed-loop supply chains.