Channel coordination in a green supply chain in the presence of demand expansion effects:

Abstract

We consider the problem of a single manufacturer who sells its products to a single retailer. The manufacturer puts in some effort for greening its operations, and the retailer also puts in a corresponding greening effort in retailing the product. Their respective greening efforts are considered to have "expansion" effects on the retail demand. The manufacturer makes decisions on the wholesale prices and its greening efforts, while the retailer makes decisions on the retail price and its corresponding greening efforts. Our results show that: (i) The ratio of the optimal greening efforts put in by the manufacturer and retailer is equal to the ratio of their green sensitivity ratios and greening cost ratios. This result holds irrespective of whether it is an integrated or a decentralized channel, (ii) Profits are higher and efforts are higher in the integrated channel as compared to the case of the decentralized channel. This is consistent with the earlier research in the channels literature, (iii) Interestingly, however, we find that, under certain conditions, optimal prices are higher in the integrated channel as compared to the case of the decentralized channel. This is not consistent with the usual „double marginalization‟ explanation given in the channels literature, (iv) By and large, the above results replicate themselves in the cases in which only one of the two channel members (i.e., either manufacturer or retailer) puts in the greening effort, (v) A two-part tariff contract from the manufacturer to the retailer, which takes into account the relevant parameters of prices and greening efforts, can produce the desired effect of channel coordination in this problem. A numerical example illustrates some of these results.