A Comparative Study of Different Compensation Strategies Among Supply Chain Firms Under Innovation Risk

Huimin Liu, Yujuan Wei () and Dingyuan Hu ()
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Huimin Liu: Guangxi University
Yujuan Wei: Guangxi University
Dingyuan Hu: Guangxi University

A chapter in LISS 2024, 2025, pp 571-592 from Springer

Abstract: Abstract With the increasing competition among firms, on the one hand, innovation has become an important source for firms to obtain competitive advantage, and the risk in the innovation process has become an important factor affecting the innovation input of firms. On the other hand, the competition between firms is increasingly manifested as the competition between supply chains. Therefore, faced with innovation risks, supply chain firms will encourage upstream and downstream firms to carry out innovation through various compensation strategies. However, how different compensation strategies differ is less considered. Therefore, this paper constructs a two-level supply chain system composed of a manufacturer and a retailer, in which the manufacturer is the leader and the retailer carries out innovation. Under the condition of innovation risk, the retailer’s innovation decision is considered when the manufacturer provides wholesale price discount compensation, cash compensation and cost sharing compensation, and the influence of different compensation strategies on the innovation of supply chain firms is analyzed. The results show that: compared with the non-compensation incentive decision, the three compensation strategies can motivate retailers to increase innovation investment, reduce retail prices, increase sales volume and increase manufacturers’ profits. Innovation risk has adverse effects on manufacturers’ and retailers’ expected profits. Among the three compensation strategies, the lowest wholesale price compensation strategy is the wholesale price discount compensation strategy. The size of sales volume and innovation investment decisions depends on the agreement of discount rate and share ratio between the two sides of the supply chain. For manufacturers, when the innovation risk is low, they will choose the wholesale price compensation strategy, except in this case, manufacturers will choose the cash compensation strategy to maintain their profits.

Keywords: Supply chain; Innovate; Risk; Compensation strategy (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:spr:lnopch:978-981-96-9697-0_44

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DOI: 10.1007/978-981-96-9697-0_44

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