Closing a Supplier’s Energy Efficiency Gap Through Assessment Assistance and Procurement Commitment

This paper analyzes the energy efficiency (EE) investment decisions of a capital-constrained manufacturer that competes with an alternative supplier for the business of a large industrial buyer. Through a series of game-theoretic models, we characterize when it is beneficial for the buyer to offer EE instruments, including assessment assistance and procurement commitment, and how these instruments interact with third-party assessment assistance to affect the supplier’s EE investment level. We find that assessment assistance helps reduce the EE gap but procurement commitment is required to eliminate it. We also find that the availability of third-party assessment assistance reduces the buyer’s incentive to offer both of its instruments, a scenario that potentially lowers the supplier’s EE investment level. Our findings provide insights for buyers and policy makers interested in improving supply-chain EE.

The online appendix is available at https://doi.org/10.1287/mnsc.2017.2941.

This paper was accepted by Vishal Gaur, operations management.