The government subsidy design considering the reference price effect in a green supply chain

This paper constructs a green supply chain with a manufacturer and a retailer. Taking into account the reference price effect of consumers based on the mental accounting theory, we investigate the following government incentive policies: R&D (research and development) subsidy, consumption subsidy, and dual subsidy. For manufacturer-led (M-led) and retailer-led (R-led) supply chains, we evaluate the optimal wholesale price, sales price, green degree of product, and the optimal subsidy of the government aiming to improve the environmental benefit or social welfare. We find that the government goal, power structure and reference price effect impact the design of subsidy mechanisms significantly. First, for M-led supply chain, the government concerned with the environmental benefit goal should only provide R&D subsidy for the manufacturer when the reference price effect is low; otherwise, the government would offer subsidy both for the manufacturer and consumers. However, the government will only offer R&D subsidy when the social welfare goal is adopted. Second, for R-led supply chain, the government aiming to improve the environmental benefit prefers dual subsidy when the reference price effect is low; otherwise, consumption subsidy is preferable. Surprisingly, under the social welfare goal, no subsidy for R-led supply chain tends to be the best option. Intriguingly, embracing the social welfare goal can result in more economic and environmental benefits for M-led supply chain, although the subsidy strategy is less effective than the environmental benefit goal. Our research can provide inspirations and references for designing government subsidy mechanisms in practice.