How Competing Retailers Invest in ESG: Strategic Behavior Under Heterogeneous Consumer Preferences

As environmental and social sustainability become an increasingly critical concern, retailers are under rising pressure from both eco-conscious consumers and evolving regulatory frameworks to enhance the environmental, social, and governance (ESG) performance of their supply chains. Given that most ESG-related violations originate from upstream suppliers, downstream retailers are compelled to invest in promoting responsible practices beyond their immediate operations. To capture this dynamic, we develop a two-tier supply chain model in which a single supplier distributes products to multiple retailers engaged in Cournot competition. Each retailer independently determines its level of investment aimed at improving the supplier’s ESG outcomes while accounting for heterogeneous consumer preferences between supplier-driven and retailer-driven sustainability efforts. Our findings reveal that retailers are only incentivized to invest when the number of market participants falls below a critical threshold. We further extend the analysis to an asymmetric setting, where only a subset of retailers engage in ESG investments and pay a premium wholesale price. In contrast to the baseline scenario, this structure may encourage higher investment levels among participating retailers when more of them are involved. Moreover, under conditions of strong consumer preference heterogeneity, a larger number of investing retailers can incentivize the supplier to reduce the wholesale price, thereby reinforcing investment incentives and facilitating improved ESG performance across the supply chain. In summary, the results provide valuable managerial implications for retailers, suppliers, and policymakers seeking to foster coordinated and sustainable ESG investment within supply chains.