Journal of Cleaner Production 269 (2020) 122361

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Journal of Cleaner Production

journal homepage: www.elsevier.com/locate/jclepro

Motivating innovation alliance’s environmental performance through

eco-innovation investment in a supply chain
Zhiping Lin, Ph.D. a, Shixun Wang, Ph.D. b, Lihong Yang, Ph.D. c, d, *
a
Institute of Supply Chain Analytics, Dongbei University of Finance and Economics, 71 Binhai St., Dalian, Liaoning, 116025, China
b
School of Business, Renmin University of China, 59 Zhong Guan Cun St., Beijing, 100872, China
c
School of Economics, Nanjing Audit University, Nanjing, China
d
National Academy of Development and Strategy, Renmin University of China, 59 Zhong Guan Cun St., Beijing, 100872, China

a r t i c l e i n f o a b s t r a c t

Article history: Although eco-innovation has been practiced in business for years, few studies have investigated eco-
Received 15 November 2019 innovation decisions when both horizontal and vertical supply chain relationships exist. This paper
Received in revised form fills this gap in the literature by analysing firms’ eco-innovation investment strategy in a supply chain
10 May 2020
with a buyer and two suppliers in the presence of knowledge spillovers and technology gaps among
Accepted 17 May 2020
Available online 23 May 2020
suppliers. To encourage improvements in the eco-innovation performance of suppliers, the buyer allo-
cates a greater market share to the supplier with the lower wholesale price. Both suppliers decide
Handling editor. Xin Tong whether to determine their eco-innovation levels unilaterally (Noncooperative innovation strategy) or
coordinate in an innovation alliance (Innovation alliance strategy). To determine the relative efficiency of
Keywords: the two innovation schemes, we study a game theoretical model that captures the interactions among
Eco-innovation investment three parties. It is demonstrated that knowledge spillovers and technology gaps have a significant impact
Supply chain on suppliers’ eco-innovation levels, the economic benefits, and the total social welfare. We also identify
Innovation alliance the conditions under which an innovation alliance is better than noncooperative innovation from the
Spillover
perspectives of both the suppliers and social welfare. In particular, both suppliers choose to formalize an
Technology gap
innovation alliance under a low-level technology gap, and social welfare benefits more under an inno-
Environmental performance
vation alliance than under noncooperative innovation.
© 2020 Elsevier Ltd. All rights reserved.

1. Introduction
Environmental protection has attracted great attention in recent
years. In practice, for any supplier in a supply chain, environmental
protection is a challenging and practical task considered a part of
cooperate social responsibility. For example, Adidas assesses all
new potential suppliers via its Social and Environmental Affairs
team. Environmental protection is a key performance index (called
E-KPI by Adidas) used to evaluate suppliers. If suppliers cannot
meet the standards, they are asked to correct the issues or are
directly rejected.1 Similar concerns regarding the environment are
observed in many other supply chains, such as those of Apple and
* Corresponding author. School of Economics, Nanjing Audit University, Nanjing,
China.
E-mail addresses: lzp568939462@163.com (Z. Lin), wangshixun@ruc.edu.cn
(S. Wang), lihong.yang@ruc.edu.cn, 18600160500@163.com (L. Yang).
1 development requires resources of a considerable size, firms jointly
For detailed information, see www.adidas-group.com/en/sustainability/
compliance/supply-chain-approach.
Nike.
Thus, many firms make eco-innovation investments to benefit
and support the sustainability of the natural environment (Kanda
et al., 2019, Hazarika et al. 2019). According to Kemp and Pearson
(2007), in the European Union (EU), eco-innovation includes “…
the production, assimilation or exploitation of a product, production
process, service or management or business method that is novel to the
organization (developing or adopting it) and which results, throughout
its life cycle, in a reduction of environmental risk, pollution and other
negative impacts of resources use (including energy use) compared to
relevant alternatives.” Prominent empirical studies have investi-
gated the effectiveness of eco-innovation development and green
technologies in improving environmental performance from the
perspective of supply chain management (Kanda et al., 2019; Chen
et al., 2017; Costantini et al., 2017b).
Many factors affect eco-innovation development across firms in
a supply chain. Innovation alliances are an important factor. As
engage in development to achieve invention. Innovation alliances

https://doi.org/10.1016/j.jclepro.2020.122361
0959-6526/© 2020 Elsevier Ltd. All rights reserved.
2 Z. Lin et al. / Journal of Cleaner Production 269 (2020) 122361
and research and development (R&D) partnerships have become
widespread phenomena, especially in high-tech industries char-
acterized by rapid knowledge spillovers, such as the computer,
chemical and pharmaceutical industries (Hagedoorn, 2002;
Roijakkers and Hagedoorn, 2006; Ko € nig et al., 2018). Although
some studies have investigated eco-innovation in supply chains
(Mylan et al., 2015; Gao et al., 2016), two issues, i.e., technology
spillovers and technology gaps, need to be further analysed.
In cooperative innovation, such as an innovation alliance,
technology spillovers induce free ride behaviour (Kamien et al.,
1992), i.e., one firm invests in R&D, while the other firms take
advantage of the investment. When a spillover effect exists, eco-
innovation has an impact on the payoff of both the firm and
other firms, inducing strategic behaviour.
Technology gaps reflect heterogeneity among the firms in a
supply chain and an innovation alliance, indicating that the firms
initially have different innovation capacities. Firms receive different
payoffs from eco-innovation and, thus, have different incentives to
engage in eco-innovation (Aghion et al., 2005). Furthermore,
technology gaps interact with technology spillovers, leading to
more complicated strategic behaviour. Although technology spill-
overs and technology gaps have been studied separately in the
literature concerning supply chains, few studies investigating eco-
innovation considered both factors, motivating our basic model.
The following two examples provide the practical background of
eco-innovation in supply chains, and the impact of supply chains
and technology spillovers can be observed. The first example is the
ever-growing practice among original equipment manufacturers
(OEMs) to outsource their manufacturing business to overseas
suppliers. For example, Nike has a global supply network involving
approximately 430 apparel factories located in 41 countries, pre-
dominantly emerging countries (Nike, 2014). However, the envi-
ronmental conditions in these countries can quickly deteriorate.
For example, China, which is the top outsourcing destination in
many industries, is suffering from severe air and water pollution.
According to reports by the Institute of Public and Environmental
Affairs (IPE), there are many examples of environmental violations
by suppliers that often supply to multinational buyers-. Such vio-
lations can result in substantial financial costs to the buying firm.
When the noncompliance of suppliers is discovered by the general
public, the OEM may incur certain costs, including demand loss and
brand damage. Therefore, buyers have an incentive to motivate
suppliers to make eco-innovation investments.
The second example is the Rainforest Alliance in the coffee and
tea plant industry. Farmers (suppliers) joining the alliance receive a
certification after reaching several standards and obtaining the
training and technical assistance deployed by the alliance.2 The
farmers who join the alliance share knowledge regarding envi-
ronmental protection and coordinate their actions in a manner
similar to an innovation alliance. These farmers can also serve as
“role models” for environmental conservation in the community
that influence other farmers’ action, such as whether to use a
cleaner production technique or obtain a certain certificate.3
This paper proposes a model used to analyse environmental
protection innovation performance in a supply chain. Suppliers can
make eco-innovation investments to reduce environmental
2
Some coffee brands and their suppliers have certification from the Rainforest
Alliance. For example, Nespresso sources 40% of its coffee from Rainforest Alliance-
certified farms. For detailed information, see www.nespresso.com/rainforest and
www.rainforest-alliance.org.
3
For detailed information, see the interview with tea farmers in Kenya and the
overall approach at https://www.rainforest-alliance.org/articles/kenyan-tea-
farmer-aspires-to-be-environmental-leader. https://www.rainforest-alliance.org/
approach.
protection costs. For example, suppliers can apply end-of-pipe
waste treatment to reduce the types and amounts of pollutants
and, thus, can reduce environmental protection costs. Moreover,
eco-innovators face particular challenges associated with knowl-
edge spillovers. There are positive externalities in the research and
development efforts of firms, especially small firms. When two
suppliers have different pollution treatment capacities resulting in
different unit costs of environmental protection, what eco-
innovation levels are optimal for the suppliers? Furthermore,
how does a firm decide whether to determine its eco-innovation
levels unilaterally or coordinate in an innovation alliance?
We consider a supply chain with a buyer and two suppliers in
which both suppliers can choose an innovation alliance or nonco-
operative innovation strategies in the presence of technological
spillovers and a gap between suppliers. We characterize the sub-
game perfect equilibrium of each innovation type and compare the
innovation outcomes in terms of the industry’s eco-innovation
level, the supply chain’s performance, and social welfare.
Our analysis demonstrates how firms’ eco-innovation levels,
profits, and social welfare vary with the spillover effect and tech-
nology gap in each innovation strategy. First, we find that in the
noncooperative innovation case, the follower’s eco-innovation level
and profit increase with the spillover effect and decrease with the
technology gap. However, this situation is not always the case for
the technology leader. Interestingly, the leader’s eco-innovation
level and profit decrease with the technology gap if and only if
the spillover effect is relatively small. Hence, our findings imply
that having a technological advantage does not necessarily moti-
vate a firm to innovate. In the innovation alliance case, we show
that the leader’s eco-innovation level increases with the spillover
effect if the technology gap is relatively small (i.e., the escape
competition effect). Second, we find that the leader’s eco-
innovation level under the innovation alliance is higher than that
in the noncooperative innovation case if the technology gap is
relatively small, whereas the follower’s eco-innovation level is al-
ways higher in the innovation alliance case. In addition, we show
that the leader has a substantial incentive to cooperate with the
follower. Finally, we find that social welfare in the innovation alli-
ance case is always higher than that in the noncooperative inno-
vation case. Thus, our findings imply that from a social welfare
perspective, policy makers should encourage firms to cooperate.
This paper is organized as follows. The relevant literature is
reviewed in Section 2, and the model is presented in Section 3. The
noncooperative innovation case and innovation alliance case are
studied in Section 4 and Section 5, respectively. In Section 6, we
compare the noncooperative innovation and innovation alliance
cases. In Section 7, social welfare is analysed. Section 8 discuss the
similarities and differences between our paper and other similar
research. Our concluding remarks are provided in Section 9.
2. Literature review
This paper lies at the intersection of several literature streams.
First, the extensive literature in the field of operation management
has studied innovation and new product development in supply
chains. Erat and Kavadias (2006) studied how a technology pro-
vider determines his innovation strategies for competing down-
stream customers. These authors showed that the technology
provider may induce the partial adoption of a new technology
through appropriate pricing decisions. In contrast to Erat and
Kavadias (2006), who focused on intertemporal discrimination by
a technology provider, Bitencourt, 2020 focused on joint product
development between two firms. More recently, Wang and Shin
(2015) studied a supply chain in which a supplier invests in inno-
vation with a manufacturer and investigated the impact of different
 Z. Lin et al. / Journal of Cleaner Production 269 (2020) 122361
contracts under endogenous innovation.4 These authors found that
revenue-sharing contracts can always coordinate the supply chain.
Bitencourt, 2020 studied revenue sharing, innovation sharing, and
investment sharing in collaborative product innovation. Chen et al.
(2019) studied the supply chain impact of government subsidies in
a research joint venture (RJV). These authors showed that in any
cost-reducing R&D effort, the government should never simulta-
neously employ both types of subsidies (per-unit production and
innovation effort subsidies). Krishnan and Loch (2005) and
Krishnan and Ulrich (2001) provided reviews of the literature
concerning innovation and new product development.
Based on the step-by-step innovation theory in the Schumpe-
terian growth paradigm (Schumpeter, 1943), Aghion and Howitt
(1992) developed a model indicating that greater competition
discourages innovation and growth. Specifically, a firm that is
currently behind the technological leader in a given sector or in-
dustry must catch up with the leader before becoming a leader. This
step-by-step assumption implies that firms in some sectors will be
neck-and-neck. On the one hand, in such sectors, by making life
more difficult for neck-and-neck firms, increased product market
competition will encourage firms to innovate to acquire a lead over
their rivals in the sector. We refer to this phenomenon as the escape
competition effect later in a supply chain that faces eco-innovation
competition. On the other hand, in uneven sectors in which firms
are not neck-and-neck, increased product market competition will
tend to discourage innovation by lagging firms because it will
decrease the additional short-run profit obtained from catching up
with the leader, highlighting the Schumpeterian effect in innova-
tion theory (Aghion et al., 2005; Aghion and Howitt, 1992).
Second, our paper is more related to eco-innovation develop-
ment (Arranz et al., 2019; Kanda et al., 2019; Hazarika et al. 2019;
Chen et al., 2017; Tumelero et al., 2017). Many studies found that
enterprises and their eco-innovation behaviour play an important
role in green development. For example, Li et al. (2019) used data of
Chinese industrial enterprises and analysed the factors driving
green development behaviour. Bitencourt, 2020 reviewed 71
studies and used these studies to perform a meta-analysis. These
authors found that company capabilities and R&D were significant
antecedents to eco-innovation. In addition, a significant relation-
ship existed between eco-innovation and firm performance. These
studies implied that eco-innovation is an important part of firm
behaviour, but prominent studies focused on empirical analyses. In
this paper, we use game theory to theoretically analyse the strategic
behaviour of eco-innovation.
Cooperative innovation and innovation alliances are popular
forms of eco-innovation practice. Cooperation can exist between
public and private sectors, such as universities and enterprises
(Scarpellini et al., 2012). In addition, firms can cooperate with each
other event though the vertical relationship complicates the
behaviour. For example, Mylan et al. (2015) studied why, how and
to what degree supermarkets stimulate upstream firms’ eco-
innovation in agri-food supply chains. Costantini et al. (2017b)
empirically studied the effectiveness of green technologies in
improving environmental performance from the perspective of the
supply chain. These authors found that both the direct and indirect
effects of eco-innovations could reduce environmental stress. Gao
et al. (2016) performed a systematic review of sustainable supply
chain innovation. These studies all imply that eco-innovation is
determined by not only the firm but also the behaviour of other
4
The literature on supply chain coordination includes Jeuland and Shugan
(1983), Moorthy (1987), Pasternack (1985), Cachon and Lariviere (2005), Spencer
and Brander (1992), and Lal and Staelin (1984). For a comprehensive literature
review, see Cachon (2003).
3
firms. The most direct study was conducted by Jakobsen et al.
(2019). These authors studied the collaborative dynamics (relative
absorptive capacity) between R&D partners influencing how they
respond to environmental policy objectives. These authors showed
that R&D partners with a higher relative absorptive capacity are
more likely to respond coherently to environmental policy objec-
tives. In our paper, we consider a supply chain that consists of two
asymmetric suppliers and a buyer, while most of the aforemen-
tioned literature focused on product innovation within a single firm
or horizonal partners. Generally, eco-behaviour is always regarded
as a part of complexity science (Helbing et al., 2015), which relates
to the conflict of multiple objectives, such as cost saving and profit
maximizing (Ekins, 2010), moral principle and social dilemma
(Capraro and Perc, 2018), etc. Our paper also enhances our under-
standing of the complexity of aspects of firms by considering
strategic behaviour, spillover effects, and technology gaps in a
supply chain.
3. Model
Consider a supply chain with one buyer and two suppliers
manufacturing one type of product.
Let i2f1; 2g be the index of the suppliers. Supplier 1 is the
technology leader in pollution treatment capacity, and supplier 2 is
the technology follower. Hereafter, we also use “leader” and “fol-
lower” to refer to supplier 1 and supplier 2, respectively. To focus on
the impact of a technology gap and innovation spillover effects on
suppliers’ eco-innovation levels and supply chain efficiency, we
assume that both suppliers provide the product at the same quality
level. The better the technology is in pollution treatment capacity,
the smaller the unit of environmental protection. Let c1 and c be the
unit environmental protection costs of supplier 1 and supplier 2,
respectively. We assume that c1  c because supplier 1 is more
efficient than supplier 2 in managing pollution; alternatively,
equivalently, supplier 1’s technology level is higher than supplier
2’s technology level. Let c  c1 represent the technology gap be-
tween the two suppliers. For simplicity, c1 is normalized to zero.
Thus, the larger the c, the larger the technology gap.
Supplier i can make an eco-innovation investment to reduce its
environmental protection cost, which sets the eco-innovation level
xi and incurs the corresponding environmental investment cost
1 kðx Þ2 (Wang and Shin, 2015). Similar to Kamien et al. (1992), we
2 i
assume that the effective eco-innovation level of supplier i is equal
to Xi ¼ xi þ bxi ð0  b  1Þ, where b represents the eco-innovation
spillover effect. Following Gilbert and Cvsa (2003), Reimann et al.
(2019), and Yoo et al. (2019), we assume that the magnitude of
the unit cost reduction realized for supplier i is qXi when the
effective eco-innovation level of supplier i is Xi , where q measures
the cost reduction amount that can be obtained by innovation in-
vestment. Consequently, when the leader’s and follower’s eco-
innovation levels are x1 and x2 , the unit production costs of the
leader and follower are c1  qðx1 þbx2 Þ ¼ qðx1 þbx2 Þ and c 
qðx2 þ bx1 Þ, respectively. For brevity, q is normalized to 1. Notably,
this assumption is not critical and does not qualitatively change our
main results.
In this study, both suppliers can decide whether they will co-
ordinate their eco-innovation investments. If the suppliers choose
to compete with one another, they determine their eco-innovation
levels unilaterally and maximize their individual profits (noncoop-
erative innovation). If the suppliers choose to coordinate their eco-
innovation investments, they maximize the sum of their profits
(innovation alliance). Similar to Kamien et al. (1992), in the two
cases considered, the two suppliers are assumed to engage in
Bertrand competition when they sell their product to the buyer.
4 Z. Lin et al. / Journal of Cleaner Production 269 (2020) 122361

Table 1
Notation.

Decision Variables

xi Supplier i’s eco-innovation level, i ¼ 1; 2.

wi Wholesale price charged by supplier i, i ¼ 1; 2.
Q Buyer’s order quantity
Parameters
c Technology gap between the leader and the follower, c  0
b Spillover effects of innovation, 0  b  1
k Innovation cost index for reducing environmental protection cost k > 0
q Sensitivity of order quantity, q > 0
a Market potential, a  c
Xi Supplier i’s effective eco-innovation level, i.e., Xi ¼ xi þ bxi
Objectives
xji Equilibrium supplier i0 s eco-innovation level under j innovation type. i2f1; 2g; j2fn; ag

pji Equilibrium i0 s profit under j innovation type. i2f1; 2; bg; j2fn; ag

SW j Social welfare under j innovation type. j2fn; ag

Thus, each supplier independently sets the wholesale price to decisions and profits and then examine the impact of the spillover
charge the buyer. Let wi ð  0Þ be the wholesale price that supplier i effect and technology gap on those decisions and profits. We pro-
charges the buyer. ceed backwards to derive the subgame perfect equilibrium.
Similar to Chen et al. (2018), we assume that the order quantity
received by supplier i is Qi ¼ Q þ ðwi  wi Þq. Here; Q is the base
quantity level of each supplier due to the existing relationship or 4.1. Suppliers’ equilibrium eco-innovation levels and profits
contract between the buyer and the suppliers. qð  0Þ is an order
allocation parameter that represents the sensitivity of the order Under the noncooperative innovation type, the two suppliers
quantity to the wholesale price gap between the two suppliers. unilaterally set their eco-innovation levels and maximize their in-
Under this allocation mechanism, the total order quantity is 2Q . dividual profits. The equilibrium wholesale prices, total order
Additionally, we assume that the inverse demand faced by the quantities and buyer’s profit are not presented in the following
buyer is p¼ a  2Q ða > cÞ. Furthermore, the buyer decides the total results (please refer to the appendix for further details).
order quantity 2Q to maximize its profit. For convenience, denote d ¼ k  q þ 2kq, f ðbÞ ¼ 3k  2q þ 4qb,
Let p1 , p2 , and pb be the leader’s profit, the follower’s profit, and and gðbÞ ¼ 2k  q þ 2qb. Additionally, assume that △xn ¼ xn1  xn2
the buyer’s profit, respectively. Consequently, the supply chain and Dpn ¼ pn1  pn2 , i.e., Dxn and Dpn , are the differences in the eco-
parties’ profits are as follows: innovation level and profit between leader and follower, respec-
tively. We have the following results.
1
p1 ðw1 ; x1 Þ ¼ ðw1 þ x1 þ bx2 ÞQ1  kðx1 Þ2 Proposition 1. For noncooperative innovation type, we have the
2
following.
1
p2 ðw2 ; x2 Þ ¼ ðw2  c þ x2 þ bx1 ÞQ2  kðx2 Þ2 (i) The leader’s and follower’s equilibrium eco-innovation levels
2
are xn1 ¼ ð2acÞq
4d
þ f cq
ðbÞ
and xn2 ¼ ð2acÞq
4d
 f cq
ðbÞ
, respectively. In
pb ðQ Þ ¼ ða  2Q  w1 ÞQ1 þ ða  2Q  w2 ÞQ2 addition, Dxn ¼ 2cq
 0.
f ðbÞ
Fig. 1 depicts the following sequence of events: under nonco- (ii) The leader’s and follower’s equilibrium profits are
operative innovation, first, the buyer sets the order quantity Q; kqgðbÞðð2acÞf ðbÞþ4dcÞ2 2
pn1 ¼ and pn2¼ kqgðbÞðð2acÞf ðb2Þ4dcÞ ,
second, the suppliers independently determine their wholesale 32ðdf ðbÞÞ2 32ðdf ðbÞÞ
ð2acÞckq gðbÞ
prices; and third, the suppliers unilaterally set their eco-innovation respectively. In addition, Dpn ¼ 2d f ðbÞ
 0.
levels. The difference between noncooperative innovation and an
innovation alliance is that during the third stage, the suppliers Proposition 1 shows that the leader’s equilibrium eco-
coordinate their eco-innovation levels to maximize the sum of their innovation level and profit are higher than those of the follower
profits. We use backward induction to obtain the subgame perfect because the leader should set a lower wholesale price than the
equilibrium. follower due to the leader having a technological advantage, i.e., an
Throughout this paper, we use superscripts to represent corre- environmental protection cost advantage. Consequently, the buyer
sponding equilibrium quantities under the innovation types and should purchase more product from the leader. As a result, the
benefit from the higher eco-innovation level outweighs the loss
subscripts to represent the supply chain members. For example, pji
from the innovation cost; thus, the leader should set a higher eco-
represents the equilibrium profit of i under innovation type j. i2
innovation level and obtain more profit.
{1,2,b},j2{n,a}, and 1, 2, and b represent supplier 1, supplier 2 and
Furthermore, the differences in eco-innovation level and profit
the buyer, respectively; n and a represent noncooperative innova-
between the leader and the follower increase with the technology
tion and innovation alliance, respectively. In Table 1, we summarize n n
gap c (i.e., vDvcx  0 and vDp
vc  0) because the greater that the
the notation for ease of reference.
technology gap is, the higher that the unit environmental protec-
tion cost is for the follower, and the lower that the eco-innovation
4. Noncooperative innovation level is selected by the follower. As a result, the buyer should
purchase more product from the leader and less product from the
In this section, we first present the suppliers’ equilibrium follower as c increases. In addition, when the technology gap is
 Z. Lin et al. / Journal of Cleaner Production 269 (2020) 122361
Fig. 1. Sequence of Events.
Note: This figure illustrates the timing of the game. Each square represents a different
stage of the game.
equal to zero, the firms are “neck-and-neck” firms and thus have
the same eco-innovation level and obtain the same profit.
4.2. Impact of the spillover effect and technology gap
In Corollary 1, we discuss the impacts of the spillover effect and
technology gap on the leader and follower’s eco-innovation levels.
In Corollary 2, we examine the impacts of the spillover effect and
technology gap on the leader and follower’s profits.
Corollary 1. In the noncooperative innovation case, we have the
following.
(i) As the spillover effect b increases, the leader’s eco-innovation
level xn1 decreases while the follower’s eco-innovation level xn2
vxn vxn
increases (i.e. vb1  0  vb2 ).
(ii) The follower’s eco-innovation level xn2 is decreasing in the
vxn
technology gap c (i.e., vc2  0); the leader’s eco-innovation level
xn1 is decreasing in the technology gap c if and only if b > b1 . In
addition, b1 is increasing in the eco-innovation cost k.
As shown in Corollary 1i, as the spillover effect b increases, the
leader’s eco-innovation level xn1 decreases while the follower’s eco-
innovation level xn2 increases. As b increases, i.e., the free-riding
effect increases, the difference in the effective eco-innovation
level between the leader and follower (i.e., ð1  bÞðx1  x2 Þ) de-
creases. Thus, the follower should increase his eco-innovation level
and set a lower wholesale price to obtain a higher order quantity as
b increases. In contrast, as b increases, the leader has less incentive
to increase her eco-innovation level despite the higher eco-
innovation level, which can mitigate the degree of ð1 bÞðx1 x2 Þ
reduction. Moreover, a higher eco-innovation level leads to a higher
investment cost. As a result, the leader’s eco-innovation level is
decreasing in the spillover effect.
Intuitively the follower’s eco-innovation level is decreasing with
the technology gap c, as shown in Corollary 1ii because, as c in-
creases, the follower’s environmental protection cost increases
relative to the leader’s. Thus, the loss from the higher investment
cost due to the increasing eco-innovation level outweighs the
benefit from the higher eco-innovation level. Note that the tech-
nology gap can refer to monopoly power between firms. This result
is consistent with the phenomenon whereby the weaker a firm’s
market position is, the less incentive it has to pursue R&D.
One might expect that the leader should increase her eco-
innovation level as the technology gap increases. Surprisingly,
this is not true. The spillover effect b determines how the tech-
nology gap affects the leader’s eco-innovation level. Anticipating
that the follower will select a lower eco-innovation level if the
technology gap c increases, the leader should also set a lower eco-
innovation level when b is relatively high. This is because if b is
relatively high, the difference in the effective eco-innovation level
between the leader and the follower is relatively small. Thus, the
5
benefit from the higher ð1 bÞðx1 x2 Þ is smaller than the loss from
the higher investment cost. Consequently, if b is relatively high, the
leader’s eco-innovation level is decreasing in the technology gap;
otherwise, the leader’s eco-innovation level is increasing in the
technology gap. In addition, the higher that the investment cost is,
the greater that the leader’s incentive is to increase her eco-
innovation level as the technology gap increases.
Corollary 2. Under noncooperative innovation, we have the
following.
(i) The leader’s profit pn1 is decreasing in the technology gap c if and
only if b > b1 .
(ii) The leader’s profit pn1 is increasing in the spillover effect b if and
only if c < c1 .
(iii) The follower’s profit is increasing in the spillover effect but
vpn vpn2
decreasing in the technology gap (i.e., vb2  0; vc  0).
Note that the leader’s eco-innovation level xn1
is decreasing in
the technology gap c if and only if b > b1 , as shown in Proposition
1ii. Corollary 2i shows that if b > b1 , not only the leader’s eco-
innovation level but also her profit is decreasing in the technol-
ogy gap c. Corollary 2ii shows that the leader’s profit is increasing in
the spillover effect b if the technology gap is relatively small. This is
because if c is relatively small, the competitive advantage for the
leader is relatively small. In this case, the larger that the spillover
effect b is, the greater that the benefit is from free riding for the
leader. As a result, the leader’s profit increases in b if c is relatively
small.
From Corollary 1, we have that the follower’s eco-innovation
level increases in the spillover effect and decreases in the tech-
nology gap. Additionally, the follower’s profit increases in the
spillover effect and decreases in the technology gap, as shown in
Corollary 2 iii.
5. Innovation alliance
Under the innovation alliance, the two suppliers coordinate
their eco-innovation levels to maximize the sum of their profits.
Additionally, we first present the suppliers’ equilibrium decisions
and profits and then examine the impact of the spillover effect and
technology gap on these decisions and profits.
5.1. Suppliers’ equilibrium eco-innovation levels and profits
For convenience, we denote yðbÞ ¼ 3k  2qð1  bÞ2 , tðbÞ ¼ k þ
2kq  qð1 þ 3b2 Þ, and hðbÞ ¼ 2k  qð1  bÞ2 . Additionally, we as-
sume that Dxa ¼ xa1  xa2 and Dpa ¼ pa1  pa2 , i.e., Dxa and Dpa , are
the differences in the eco-innovation level and profit between the
leader and follower, respectively. Let A1 ¼ ð2a  cÞyðbÞð1 þ bÞ þ
4cð1  bÞtðbÞA2 ¼ 2ayðbÞðk  2qð  1 þ bÞbÞ þ cðk2 ð1 þ 8qÞ 
4q2 ð1 þ bÞ3 b  2kqð1 þ bð5 þ 2bÞÞÞ, and A3 ¼ 2ayðbÞ þ cðk þ
8kq  2qð1 þ bð2 þ 5bÞÞÞ.
Proposition 2. Under an innovation alliance, we obtain the
following.
(i) The leader’s and follower’s equilibrium eco-innovation levels
are xa1 ¼ ð2acÞqð1þ
4tðbÞ
bÞ cqð1bÞ
þ yðbÞ and xa2 ¼ ð2acÞqð1þbÞ
4tðbÞ
 cqð1
yðbÞ
bÞ
,
2cqð1bÞ
respectively. In addition, Dxa ¼ yðbÞ
 0.
6 Z. Lin et al. / Journal of Cleaner Production 269 (2020) 122361
Fig. 2. Suppliers’ Profits with Respect to the Spillover Effect under an Innovation
Alliance (q ¼ 0:5, k ¼ 2, and a ¼ 4).
Note: This figure illustrates the relationship between the spillover effect (bÞ and profits
of leaders (p1) and followers (p2) under different technology gaps (c) and innovation
alliances. A large technology gap increases the profit of leaders but decreases that of
followers.
(ii) The leader’s and follower’s equilibrium profits are pa1 ¼
kq ð2acÞckqhðbÞ
ðqA21 þ2A2 A3 Þ and pa2 ¼ pa1  2yðbÞtðbÞ
, respec-
32yðbÞ2 tðbÞ2
ð2acÞckqhðbÞ
tively. In addition, Dpa ¼ 2yðbÞtðbÞ
 0.
As shown in Proposition 2, under an innovation alliance, the
leader’s eco-innovation level and profit are higher than those of the
follower, which is similar under noncooperative innovation. Addi-
tionally, the differences in the eco-innovation level and profit be-
tween the leader and follower increase with technology gap c,
which is similar under noncooperative innovation.
Nevertheless, Dxa decreases with the spillover effect b. Specif-
ically, the leader’s eco-innovation level is the same as the follower’s
eco-innovation level when b ¼ 1. Notably, under the innovation
alliance, the two firms coordinate their eco-innovation levels to
maximize the sum of the overall profits. Moreover, the difference in
the effective eco-innovation level between the leader and follower
(i.e., ð1  bÞðx1  x2 Þ) is zero when b ¼ 1. Consequently, the two
firms will select the same eco-innovation level when the spillover
effect is fully internalized (i.e., b ¼ 1). Additionally, b ¼ 1 refers to
an RJV between the firms (Kamien et al., 1992).
5.2. Impact of the knowledge spillover and technology gap
In Corollary 3, we discuss the impacts of the knowledge spillover
and technology gap on the leader’s and follower’s eco-innovation
levels. Then, we investigate the impacts of the spillover effect and
technology gap on the leader’s and follower’s profits.
Corollary 3. In the innovation alliance case, we obtain the following.
(i) The leader’s eco-innovation level xa1 decreases with the tech-
nology gap c if and only if b > b2 .
(ii) The leader’s eco-innovation level xa1 increases with in the
spillover effect b if and only if c < c2 .
(iii) The follower’s eco-innovation level xa2 increases with the spill-
over effect b but decreases with the technology gap c (i.e.,
vxa2
0 and vc < 0).
There are similarities and differences between the above and
the results obtained in Corollary 1. On the one hand, the follower’s
eco-innovation level still increases as the spillover effect increases b
or the technology gap c decreases. Again, the leader’s eco-
innovation level decreases with the technology gap if the spill-
over effect is relatively large.
Fig. 3. Difference in the Follower’s Profit between an Innovation Alliance and
Noncooperative Innovation (k ¼ 2; q ¼ 0:5, and a ¼ 4).
Note: This figure illustrates the difference in the follower’s profit (△p) between an
innovation alliance and noncooperative innovation. The difference is positive with a
small technology gap and negative with a large technology gap. Therefore, the follower
will cooperate with the leader in the case of a small technology gap.
In contrast, Corollary 3ii shows that the leader should set a
higher eco-innovation level due to the spillover effect if the tech-
nology gap is relatively small because the smaller the technology
gap, the greater the competition between firms. In this case, the
leader should increase her eco-innovation level to escape compe-
tition (the “escape competition” effect (Aghion et al., 2005)). In
contrast, when the technology gap is relatively large, the leader has
greater market power. Thus, as the spillover effect b increases, the
leader should decrease her eco-innovation level to reduce her in-
vestment cost.
Due to computational complexity, we only provide a numerical
study to investigate the impacts of the spillover effect and tech-
nology gap on both suppliers’ profits. As shown in Fig. 2, we find
that the insights obtained regarding noncooperative innovation
continue to hold under the innovation alliance.
6. Noncooperative innovation and innovation alliance
In this section, we first compare the suppliers’ equilibrium eco-
innovation levels under the two innovation types. Then, from the
suppliers’ perspective, we investigate which innovation type, i.e.,
noncooperative innovation or innovation alliance, should be
adopted. Let Dxi and Dpi for i ¼ 1; 2 be the eco-innovation level and
supplier’s profit in innovation alliance and noncooperative inno-
vation, respectively. Thus, Dxi ¼ xai  xni and Dpi ¼ pai  pni , i ¼ 1; 2:
6.1. Comparisons of eco-innovation levels
In this section, we compare the eco-innovation levels in inno-
vxa2 vation alliance and noncooperative innovation. Thus, we obtain the
vb
>
following results.
Proposition 3. (i) The leader’s eco-innovation level under the
innovation alliance is higher than that under
noncooperative innovation if and only if
c < c3 .
(ii) The follower’s eco-innovation level under the innovation alli-
ance is larger than that under noncooperative innovation (i.e.,
Dx2  0).
 Z. Lin et al. / Journal of Cleaner Production 269 (2020) 122361 7

(iii) If b ¼ 0, the follower’s and leader’s eco-innovation levels under under an innovation alliance are as follows:
the innovation alliance are equal to those under noncooperative     
innovation.
1 ð2a  cÞ2 k 4 þ 5q þ q  3 þ 2b
SW n ¼ kq
As shown in Proposition 3ii, the combined-profits externality of 16 d2
the follower always dominates the competitive-advantage exter-
nality; thus, the follower should set a higher eco-innovation level  !
under an innovation alliance. However, when the technology gap is 16c2 k þ gðbÞ
þ
relatively large, the competitive-advantage externality of the leader f ðbÞ2
is relatively large and, thus, dominates the combined-profits ex-
ternality. Consequently, the leader should set a lower eco- 1  
innovation level under an innovation alliance if the technology SW a ¼ kq A 4 þ c2
ðA 5  A6 þ A7 Þ ;
gap is relatively large. In addition, when the spillover effect is equal 16ðyðbÞtðbÞÞ2
to zero, both types of externalities vanish, and therefore, both
respectively. Here, A4 ¼ 4aða  cÞyðbÞ2 ðkð4 þ 5qÞ þ qð  3 þ ð2 
suppliers should set the same eco-innovation level under both
11bÞbÞÞ,
innovation types.

A5 ¼ 3k3 ð28 þ qð79 þ 64qÞÞ

6.2. Comparisons of the suppliers’ profits
 4q3 ð  1 þ bÞ2 ð7 þ bð  8 þ bð42 þ bð  24 þ 47bÞÞÞÞ;
In this section, we compare the supplier’s profits in innovation 
alliance and noncooperative innovation. Thus, we obtain the A6 ¼ k2 q 187 þ 64q2 ð  1 þ bÞ2 þ bð  146 þ 451bÞ þ 4qð79
following results.
Proposition 4. (i) b ¼ 0, Dp1 ¼ Dp2 ¼ 0. 
þ bð  62 þ 175bÞÞ ;
(ii) Dp1  Dp2 .
Proposition 3 iii shows that if the spillover effect is equal to zero, and
both suppliers’ eco-innovation levels under an innovation alliance

are the same as those under noncooperative innovation. Thus, the
A7 ¼ 4kq2 33 þ qð  1 þ bÞ2 ð21 þ bð  10 þ 53bÞÞ þ bð
leader’s and follower’s profits under an innovation alliance are the
same as those under noncooperative innovation if b ¼ 0.

Proposition 4ii shows that the leader can obtain higher profits  56 þ bð182 þ bð  136 þ 169bÞÞÞ :
than the follower if the leader chooses an innovation alliance. Thus,
if the follower wishes to cooperate with the leader, both suppliers First, we examine the impacts of the spillover effect b and
will choose the innovation alliance; if the follower wishes to technology gap on social welfare under each innovation type. Then,
compete with the leader, both suppliers can only choose nonco- we compare social welfare under the two innovation types. Under
operative innovation regardless of whether the leader wishes to noncooperative innovation, we can analytically obtain the
cooperate with the follower. Thus, we only consider the follower’s following results.
profit under the two types of innovation.
Fig. 3 shows that the follower should cooperate with the leader Proposition 5. Under noncooperative innovation, we obtain the
if the technology gap is relatively small; otherwise, the follower following:
should compete with the leader to innovate. According to
Proposition 3, the follower’s eco-innovation level under the inno- (i) Social welfare decreases with the technology gap c if and only if
2 n
SW > 0).
c < c4 (i.e., v vc
vation alliance is higher than that under noncooperative innova- 2

tion, and the leader’s eco-innovation level under the innovation
alliance is higher than that under noncooperative innovation if the
technology gap is relatively small. Thus, when the technology gap is
relatively small, the benefit from the decreased environmental
protection cost exceeds the loss from the higher investment cost.
Consequently, the follower should cooperate with the leader when
the technology gap is relatively small. In this case, the larger the
spillover effect, the greater the benefit from reducing environ-
mental protection costs; thus, the follower has a greater incentive
to choose the innovation alliance. In contrast, when the technology
gap is relatively large, the benefit from reducing environmental
protection costs is smaller than the loss from the higher investment
cost. As a result, the follower should compete with the leader when
the technology gap is relatively large.
7. Social welfare analysis
In this section, we investigate which innovation types are better
from a social welfare perspective. Let SW j ¼ pj1 þ pj2 þpjb þ CSj be
social welfare, where CSj ¼ ðQ j Þ2 is the consumer surplus. Thus, we
obtain that social welfare under noncooperative innovation and
(ii) Social welfare increases with the spillover effect b if and only if
c < c5 .
Proposition 5i and Fig. 4a show that social welfare first de-
creases and then increases as the technology gap increases. On the
one hand, when the technology gap is relatively small, the firms are
approaching “neck-and-neck” competition, and the competition is
relatively intense. As the technology gap increases (and c < c4 ), the
buyer will purchase less product from the suppliers, and thus, the
consumer surplus decreases. Consequently, if the technology gap is
relatively small, social welfare decreases with the technology gap.
On the other hand, when the technology gap is relatively large, the
leader dominates the market, and competition is relatively low. In
this case, the increase in the leader’s profit is greater than the
decline in the consumer surplus; thus, if the technology gap is
relatively large, social welfare increases with the technology gap.
As shown in Proposition 5ii and Fig. 4a, if the technology gap is
relatively small, the competition between the two suppliers is
relatively high; in this case, the free-riding effect dominates. Thus,
social welfare increases with the spillover effect if the technology
gap is relatively small. When the technology gap is relatively large,
the leader’s profit decreases with the spillover effect as shown in
8 Z. Lin et al. / Journal of Cleaner Production 269 (2020) 122361
Fig. 4. Social Welfare with Respect to the Technology Gap under Both Innovation
Types (k ¼ 2; q ¼ 0:5, and a ¼ 4).
Note: This figure illustrates the relationship between social welfare and a technology
gap under different spillover effects and innovation types. Social welfare increases
with the spillover effect if the technology gap is relatively small but decreases if the
technology gap is relatively large.
Corollary 2ii. As a result, social welfare decreases with the spillover
effect if the technology gap is relatively large.
In the case of an innovation alliance, it is challenging to
analytically examine the impacts of the technology gap and the
spillover effect on social welfare. We provide a numerical study to
provide insight. Fig. 4b indicates that Proposition 5 continues to
hold under an innovation alliance.
Finally, we compare social welfare under the two innovation
types. Let DSW ¼ SW a  SW n . We conduct a numerical study to
obtain insight. Fig. 5 yields the following observations.
Observation 1: Social welfare under an innovation alliance is
always greater than that under noncooperative innovation (i.e.,
DSW  0).
We can show that the follower’s effective eco-innovation level
under an innovation alliance is higher than that under noncoop-
erative innovation, i.e., the follower’s unit environmental protec-
tion cost is lower. Additionally, as shown in Proposition 5ii, the
leader has a greater incentive to form an alliance than the follower.
Thus, the combined profit under the innovation alliance is greater
than the sum of the two suppliers’ profits under noncooperative
innovation, and the wholesale prices charged to the buyer are
lower. Consequently, both firms and consumers benefit from the
innovation alliance. This result is consistent with the argument
suggesting that the government should encourage companies to
form innovative alliances.
Observation 2: As the spillover effect b increases, the difference
in social welfare between an innovation alliance and noncoop-
erative innovation increases (i.e., vDvSW
b  0).
As the spillover effect b increases, the unit environmental pro-
tection costs under the innovation alliance tend to decline more
than those under noncooperative innovation. As a result, the
benefit for both firms and consumers from the innovation alliance
is higher. Consequently, the difference in social welfare between an
innovation alliance and noncooperative innovation increases with
the spillover effect b (Kamien et al., 1992).
Notably, the greater the technology gap, the more market power
the leader has, and the less competition there is. Thus, as the
technology gap increases, the benefit for both firms and consumers
from an innovation alliance is lower. Consequently, the difference
in social welfare between an innovation alliance and
noncooperative innovation decreases with the technology gap c.
8. Discussion
This study makes various contributions to recent research on
eco-innovation (e.g., Ekins, 2010; Scarpellini et al., 2012; Kanda
et al., 2019; Alos-Simo et al., 2020; Latupeirissa and Adhariani,
2020).
First, we study eco-innovation decisions when both horizontal
and vertical supply chain relationships exist. Chen et al. (2018) also
consider a supply chain comprising a buyer and two suppliers. They
study how the buyer improves the suppliers’ sustainability per-
formance through different sourcing strategies. However, they do
not incorporate the spillover effect and technology gap into their
model. With the spillover effect and technology gap, we derive the
equilibrium solutions for both the noncooperative innovation strat-
egy and the innovation alliance strategy. We show that for a given
innovation strategy, both the leader’s profit and eco-innovation
level are higher than those of the follower. This result is similar
to those of Bitencourt, 2020 and Zubeltzu-Jaka et al. (2018), who
empirically find a positive relationship between a firm’s eco-
innovation and firm performance.
Second, we show that under both innovation strategies, the
follower’s eco-innovation level is always increasing in the spillover
effect and decreasing in the technology gap. However, this is not
always the case for the leader. Specifically, under the noncoopera-
tive innovation scenario, if the technology gap is relatively small
(i.e., market competition increases), the leader should choose a
higher eco-innovation level due to the spillover effect. This finding
is consistent with Aghion et al. (2005), who state that as market
competition increases, the leader firm has more incentive to
innovate to escape competition. However, they do not consider the
spillover effect. Interestingly, we find that if the spillover effect is
relatively large, the leader should set a lower eco-innovation level
as the technology gap increases. In addition, a larger spillover effect
always leads to larger follower’s profit but smaller leader’s profit if
the technology gap is relatively large.
Third, we compare the noncooperative innovation and innova-
tion alliance strategies from the perspectives of the eco-innovation
level, suppliers, and social welfare. We find that the follower’s eco-
innovation level is smaller under noncooperative innovation than
under an innovation alliance. This finding is similar to those of del
Río et al. (2016) and Kanda et al. (2019). Both state that cooperation
is the main driver of eco-innovation. However, we also show that
the leader’s eco-innovation level is higher under an innovation
alliance than under noncooperative innovation only if the tech-
nology gap is relatively small.
We also show that if the technology gap between suppliers is
relatively small, both suppliers should cooperate on innovation.
Both Jakobsen et al. (2019) and Kamien et al. (1992) find a similar
result. Jakobsen et al. (2019) empirically find that firms can benefit
from cooperating with similar R&D firms, while Kamien et al.
(1992) show that when firms are symmetric (i.e., the technology
gap is equal to zero), firms’ profits are higher under an innovation
alliance than under noncooperative innovation. However, we
further show that when the technology gap is relatively small,
suppliers have more incentive to choose an innovation alliance as
the spillover effect increases. In addition, social welfare is always
smaller under noncooperative innovation than under an innovation
alliance.
Finally, we provide policy implications from the point of view of
social welfare. For example, once the technology gap between firms
is relatively small, the government may choose to build an indus-
trial park to increase firm agglomeration and hence spread the
spillover effect. This is because when the technology gap is
 Z. Lin et al. / Journal of Cleaner Production 269 (2020) 122361
Fig. 5. Difference in Social Welfare Between an Innovation Alliance and Nonco-
operative Innovation (k ¼ 2; q ¼ 0:5, and a ¼ 4).
Observation 3: As the technology gap c increases, the difference in social welfare
between the innovation alliance and noncooperative innovation decreases (i.e.,
vDSW
vc  0).
Note: This figure illustrates the difference in social welfare (△SW) between an inno-
vation alliance and noncooperative innovation. Social welfare under an innovation alli-
ance is always greater than that under noncooperative innovation. The difference
increases with technology spillover (b).
relatively small, social welfare increases as the spillover effect
increases.
9. Conclusion
Innovation alliances are attracting increasing attention among
both firms and governments. In this paper, we examine whether an
innovation alliance or noncooperative innovation is preferable in
the presence of an innovative spillover effect and a technology gap
between suppliers from the suppliers’ and government’s perspec-
tives. Notable, the goal of innovation is to reduce both suppliers’
environmental protection costs.
We consider a two-level supply chain in which both suppliers
(leader and follower) invest in innovation and sell a product to a
buyer, which, in turn, sells to consumers. We first derive the sub-
game perfect equilibrium of each innovation type. Under nonco-
operative innovation, we show that the leader’s eco-innovation
level and profit are greater than those of the follower. Moreover, the
follower’s eco-innovation level and profit decrease with the tech-
nology gap and increase with the spillover effect. However, the
leader’s eco-innovation level increases with the technology gap
only if the spillover effect is relatively small. Under an innovation
alliance, we show that the insights derived under noncooperative
innovation continue to hold.
Then, we compare noncooperative innovation and innovation
alliances from the perspective of suppliers and government. We
show that the leader’s eco-innovation level under an innovation
alliance is higher than that under noncooperative innovation if and
only if the technology gap is relatively small. Nevertheless, the
follower’s eco-innovation level is always higher under an innova-
tion alliance. Finally, we show that social welfare under an inno-
vation alliance is higher than that under noncooperative
innovation. Furthermore, the difference in social welfare between
an innovation alliance and noncooperative innovation increases
with the spillover effect and decreases with the technology gap.
Compared with the existing literature, the results reported here
9
imply that the optimal eco-innovation level is influenced by the
innovation type (cooperative or non-cooperative), technology gap
and spillover effect. These determinants warrant further investi-
gation in the future. In addition, compared with studies focusing on
decisions within firms, such as organization decisions, leadership
decisions, etc., the results reported here provide a new perspective
enhancing our understanding of eco-behaviour, including the
interaction between firms and strategic behaviour.
Regarding the policy implications, this paper suggests a diverse
policy under different circumstances. Social welfare is higher under
an innovation alliance, but it is less profitable for the leader when
the technology gap is large. Therefore, in industries with a large
technology gap, policy makers should pay more attention to fol-
lowers to narrow the gap. Meanwhile, in the short term during
which an innovation alliance cannot be easily formed, policy
makers could decrease technology spillovers outside the alliance,
such as by establishing strict intellectual property rights, because
the difference in social welfare between an innovation alliance and
noncooperative innovation decreases with lower technology
spillovers.
Notably, policy aiming to decrease technology spillovers may
expand the technology gap because it is more difficult for followers
to imitate. As a result, it is important to balance the objective of
policy and use policy packages rather than any singe policy to
ensure that the policies complement each other.
In this study, we assume that R&D bears no risk, but in practice,
R&D is often uncertain and risky. Hence, in the presence of a
technology gap and spillover effects, the impacts of innovation risk
on supply chain decisions may be an interesting direction for future
work. The use of empirical methods to verify the results of this
paper is also a potential avenue for future research.
CRediT authorship contribution statement
Zhiping Lin: Software, Writing - original draft. Shixun Wang:
Data curation, Investigation, Validation. Lihong Yang: Conceptu-
alization, Methodology, Writing - review & editing, Supervision.
Declaration of competing interest
The authors declare that they have no known competing
financial interests or personal relationships that could have
appeared to influence the work reported in this paper.
Acknowledgments
We benefited from comments and suggestions of seminar par-
ticipants at Renmin University of China, Zhejiang University, Uni-
versity of California, Berkeley, University of San Diego, and
participants in various workshops and conferences. Lihong Yang
acknowledges financial support from the National Natural Science
Foundation of China (NSFC: 71573269). This article started while
authors were visitors at the University of San Diego and the Hass
School of Business at the University of California, Berkeley, and the
hospitality of whom we gratefully acknowledge. All errors are our
own.
Appendix
Throughout the analysis, to ensure that both the suppliers’ and
the buyer’s profit functions are concave, we assume that
gðbÞ ¼ 2k  q þ 2qb > 0 and d ¼ k  q þ 2kq > 0 under noncooper-
ative innovation and hðbÞ ¼ 2k  qð1  bÞ2 > 0 and
2
tðbÞ ¼ k þ 2kq  qð1 þ3b Þ > 0 under an innovation alliance.
10 Z. Lin et al. / Journal of Cleaner Production 269 (2020) 122361

 2
Furthermore, to guarantee that the optimal wholesale prices wn2 
kqgðbÞ ð2acÞf4ðdbcÞ
0 and wa2  0, we assume that f ðbÞ ¼ 3k  2q þ 4qb > 0 under
Additionally, note that pn2 ¼ 2 and both f ðbÞ and
noncooperative innovation and yðbÞ ¼ 3k  2qð1  bÞ2 > 0 under an vpn2
32d

innovation alliance. Note that we consider these decisions and
profits for b2½0; 1. Finally, we assume that d > 0 and 3k > 2q under
noncooperative innovation and k þ 2kq  4q > 0 and 3k > 2q under
an innovation alliance.
Proof of Proposition 1. We solve the problem using backward
induction. Note that under noncooperative innovation, the two
suppliers each unilaterally determine their eco-innovation levels to
maximize their individual profits. We first substitute Qi ¼ Q þ
ðwi wi Þq into the two suppliers’ and the buyer’s profit functions.
gðbÞ are increasing in b. Thus, vb
 0. ,
Proof of Proposition 2. Note that under an innovation alliance,
the two suppliers coordinate their eco-innovation levels to maxi-
mize the sum of their profits. However, the two suppliers inde-
pendently set their wholesale prices to maximize their individual
profits, as they would under noncooperative innovation. We first
substitute Qi ¼ Q þ ðwi wi Þq into the two suppliers’ and the
buyer’s profit functions. Let pðx1 ; x2 Þ ¼ p1 ðx1 ; x2 Þ þ p2 ðx1 ; x2 Þ be
the sum of the two suppliers’ profit. pðx1 ; x2 Þ ¼  kx21 b  kx22 b þ
2 2

v2 pi ðxi Þ
Each supplier’s profit pi ðxi Þ is concave in xi since vx2i
¼  k < 0, ðQ þ qðw1  w2 ÞÞð  c þ w2 þ x2 þ x1 bÞ þ ðQ þ qð  w1 þ
v2 pðx1 ;x2 Þ
for i ¼ 1; 2. Thus, simultaneously solving the first-order conditions w2 ÞÞðw1 þ x1 þ x2 bÞ. pðx1 ; x2 Þ is concave in xi since vx2i
¼ 
i ðxi Þ
(FOCs) vpvx i
¼ 0, we obtain x1 ðw1 ; w2 ; Q Þ ¼ Q qwk1 þqw2 and x2 ðw1 ; k < 0, for i ¼ 1; 2. Thus, simultaneously solving the FOCs vpðx1 ;x2 Þ
¼
vxi
w2 ; Q Þ ¼ Q þqwk1 qw2 . Substituting x1 ðw1 ; w2 ; Q Þ and x2 ðw1 ; w2 ; Q Þ 0, we obtain x1 ðw1 ; w2 ; Q Þ ¼ 1k ½qðw1 w2 Þð1 þbÞ þQ ð1 þbÞ and
into both suppliers’ profit functions, we obtain each supplier’s
x2 ðw1 ; w2 ; Q Þ ¼ 1k ½  qðw1  w2 ÞÞð  1 þ bÞ þ Q ð1 þ bÞ.
profit: p1 ðw1 ; w2 ;
1 ðQ qðw w ÞÞðQ þ2kw þ2Q b þqðw w Þð 1 þ2bÞÞ
Substituting x1 ðw1 ; w2 ; Q Þ and x2 ðw1 ; w2 ; Q Þ into both suppliers’
Q Þ ¼ 2k 1 2 1 1 2 profit functions, we obtain each supplier’s profit:
and p2 ðw1 ; w2 ; Q Þ ¼ 1 ðQ þ qðw1  w2 ÞÞð  2ck þ Q þ 2kw2 þ
2k 1 ðqðw w Þð 2kw þqðw w Þð1 þ bÞ2 Þ -
p1 ðw1 ; w2 ; Q Þ ¼ 2k 1 2 1 1 2
v2 pi ðwi Þ qgðbÞ
2Q b  qðw1  w2 Þð  1 þ 2bÞÞ. vw2i
¼  k
< 0. Thus, the þQ 2 ð1 þ bÞ2 þ2Q ðkw1 qðw1 w2 Þð1 þ3b2 ÞÞÞ and p2 ðw1 ;w2 ;Q Þ ¼
optimal wholesale prices are obtained by simultaneously solving 1 ð 2ckðQ þ qðw1  w2 ÞÞ þ qðw1  w2 Þð2kw2 þ qðw1 
2k
vpi ðwi Þ
the FOCs ¼ 0 (i ¼ 1; 2). The unique optimal solutions are
vwi w2 Þð1 þ bÞ2 Þ þ Q 2 ð1 þ bÞ2 þ 2Q ðkw2 þ qðw1  w2 Þð1 þ 3b2 ÞÞÞ.
  
v2 pi ðwi Þ
given by w1 ðQ Þ ¼ 1k þ1q Q þ cðkþqð1þ2 bÞÞ
and w2 ðQ Þ ¼  1k þ vw2i
¼  qhðkbÞ < 0. Thus, the optimal wholesale prices are ob-
f ðbÞ
   i ðwi Þ
1 Q þ 1c 1 þ k
tained by simultaneously solving the FOCs vpvw ¼ 0 (i ¼ 1; 2). The
q 2 f ðbÞ
. Substituting wi ðQ Þ and xi ðw1 ðQ Þ; w2 ðQ Þ; Q Þ i

unique optimal solutions are given by

into the buyer’s profit for i ¼ 1; 2, we obtain the buyer’s profit: Q cðkqð1þbÞ2 Þ Q þ3Q b
2
Q cð2kqð1þbÞ2 Þ
    w1 ðQ Þ ¼ q þ yðbÞ
 k
and w2 ðQ Þ ¼ q þ yðbÞ

2 2
pb ðQ Þ ¼ 2aQ  4Q 2 þ Q  c þ 2 1k  1q Q þ c k 2q. pb ðQ Þ is Q þ3Q b
2
f ðbÞ
k
. Substituting wi ðQ Þ and xi ðw1 ðQ Þ; w2 ðQ Þ; Q Þ into the buyer’s
v2 pb ðQ Þ vpb ðQ Þ 2 2
concave in Q since ¼  4d < 0. Thus, solving the FOC ¼ profit, we obtain the buyer’s profit: pb ðQ Þ ¼ ð2a  cÞQ þ c k q2 þ
vQ 2 kq vQ yðbÞ
 
0, we obtain the equilibrium order quantity Q n ¼ ð2acÞkq . 2 2 2þ6b
2
v2 pb ðQ Þ
4d Q  4 qþ k . pb ðQ Þ is concave in Q since 2 ¼ 
Substituting Q n into these decisions and profits, we obtain xn1 ¼ vQ
4tðbÞ vpb ðQ Þ
ð2acÞq
þ f cq , xn ¼ ð2acÞq
 f cq , wn1 ¼ ð2acÞðkqÞ
þ cðkþqð1þ2 bÞÞ
, wn2 ¼ kq
< 0. Thus, solving the FOC vQ ¼ 0, we obtain the equilibrium
4d ðbÞ 2 4d ðbÞ 4d f ðbÞ
! ð2acÞkq
order quantity Q a ¼ 4tðbÞ
. Substituting Q a into these decisions
ð2acÞðkqÞ cð2kþqð1þ2bÞÞ ð2aþcÞ2 8c2 k
þ f ðbÞ
, pnb ¼ 1 kq
8 þ , pn1 ¼
f ðbÞ2
obtain xa1 ¼ ð2acÞqð1þ bÞ bÞ a
, x2 ¼ ð2acÞqð1þ bÞ
4d d
and profits, we 4tðbÞ
þ cqð1
yðbÞ 4tðbÞ

kqgðbÞðð2acÞf ðbÞþ4dcÞ2   
32ðdf ðbÞÞ2
and pn2 ¼ 1
32ðdf ðbÞÞ2
kqgðbÞ cqð1bÞ
, wn ¼ 1 2a þ c  2ck þ 2ð2aþcÞkq
, wn2 ¼ 1 2a þ c þ 2ck þ
yðbÞ 1 4 yðbÞ tðbÞ 4 yðbÞ

2ð2aþcÞkq
tðbÞ
, pa1 ¼ kq
ðqA21 þ 2A2 A3 Þ, pa2 ¼ pa1  ð2acÞckqhð
2yðbÞtðbÞ
bÞ
2
32yðbÞ tðbÞ2
2
ðð2a  cÞf ðbÞ  4dcÞ kqð4a2 ðyðbÞÞ2 4acðyðbÞÞ2 þc2 ðk2 ð17þ16qÞþ4q2 ð1þbÞ4 4kqð56bþ9b ÞÞÞ
2
and pnb ¼ .
8ðyðbÞÞ2 tðbÞ
,
vxa1 q
Proof of Corollary 1. (i) Note that f ðbÞ is increasing in b; thus, Proof of Corollary 3. (i) Note that ¼ ð4tðbÞð1 
vxn1 vxn2
vc bÞyðbÞ
4tð

vb
 0 and vb
 0. bÞ  ð1 þ bÞyðbÞ . Let HðbÞ ¼
vxn2 vxn
(ii) Clearly,  0. On the other hand, we find that vc1  0 if and 4tðbÞð1  bÞ  ð1 þ bÞyðbÞ. HðbÞ is
vc   
only if b > b1 ¼ 14  2 þ k 8 þ 1q b1
. Furthermore, vvk > 0. decreasing in b, Hð0Þ > 0, and
Hð1Þ < 0. Thus, there exists a unique
, a a
b2 such that vxvc1  0 if b < b2 and vxvc1 
0 if b  b2 .
Proof of Corollary 2. Taking the derivatives of pn1 and pn2 given in
(ii) Note that ð1þ bÞ
tðbÞ
increases in b and ð1 bÞ
yðbÞ
decreases in b. Thus,
vpn1
Proposition 1 with respect to c and b, we find that (i) vc  0 if and vxa vxa1
vpn there exists a unique c2 such that vb1  0 if c < c2 and vc  0 if
only if b > b1 ; and (ii) 1
0 if and only if c < c1 ¼
vb c  c2 .
2af ðbÞ2 vxa2 ð1þbÞ ð1bÞ
k2 ð29þ40qÞþ8kqð52qþ5bþ4qbÞþ4q2 ð3þ4ð2þbÞbÞ
. (iii) Note that (iii) Clearly,  0. Additionally, increases in b and
vc tðbÞ yðbÞ
n
vp
ð2a cÞf ðbÞ  4dc > 0 (to ensure that xn2  0), and thus, vc
1
 0.
 Z. Lin et al. / Journal of Cleaner Production 269 (2020) 122361 11

vxa industries. J. Clean. Prod. 155, 141e154.

decreases in b; thus, vb2  0. , del Río, P., Pen ~ asco, C., Romero-Jorda
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Proposition 3. From (i) and (ii),
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1þb 1b Ekins, P., 2010. Eco-innovation for environmental sustainability: concepts, progress
Dx1 ¼ xa1 xn1
¼ ð2a cÞq 4tðbÞ 4d cq f ðbÞ yðbÞ and Dx2 ¼ xa2 
1 1
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 0 due to 3k > 2q. Thus, we have the 1518e1538.
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