Game-theoretic coordination for carbon emission abatement and quality enhancement in two-stages textile supply chains with stochastic demand and return policy

This study investigates the joint effects of product quality improvement, carbon emission reduction under cap and trade regulation and innovative technologies, and return policies on decision-making in a two-level supply chain (SC) consisting of a manufacturer and a retailer. Although these factors have been examined individually or in partial combinations in prior studies, their simultaneous consideration, despite their inherent interdependence along the supply chain, has received limited attention. We develop a stochastic demand model in which demand and product returns are jointly influenced by product quality, emission reduction rate, and refund price. Since investments in quality improvement and emission reduction are costly and borne solely by the manufacturer, decentralized decision-making may discourage such investments. To address this issue, we analyze centralized and decentralized SC structures using Stackelberg and Nash game frameworks and examine Wholesale Premium Price (WPP) and Cost-Sharing (CS) contracts as coordination mechanisms. These contracts are designed to facilitate interaction between the manufacturer and the retailer, reduce the manufacturer’s effective investment burden, and incentivize sustainable and quality-enhancing decisions. The results show that quality improvement and emission reduction investments are structurally complementary. The quality enhances demand and reduces return quantities, while emission reduction alleviates regulatory cost pressures. Moreover, high product quality does not necessarily imply a high refund price, as quality investment can partially substitute for refund generosity by reducing return volumes. The effectiveness of coordination contracts depends on the SC power structure. While centralized decision-making yields the highest overall performance, the WPP contract effectively coordinates the SC under both Stackelberg and Nash games, whereas the CS contract is beneficial mainly under Nash competition. A numerical example inspired by the textile supply chain illustrates how coordination enables emission reduction and quality improvement with limited price increases, ensuring regulatory compliance and consumer acceptance.