Consumers’ free riding: Pricing and retailer service decisions in a closed-loop supply chain

Abstract

Increased awareness of environmental and social responsibility has prompted many manufacturers to adopt product recycling programs. In addition, with the development of the internet and e-commerce, the supply chain structure has changed from a single physical store to a mode in which online and offline outlets coexist. At the same time, consumers usually obtain a product’s information in a physical store before purchasing it online, which is recognized as free-riding behavior. In this paper, we apply a Stackelberg game to explore the joint effects of free-riding and the reverse revenue-sharing ratio on pricing strategies and offline retailer service decisions. We show that the reverse revenue-sharing ratio impacts the online and offline prices under different decision-making models in quite opposite ways; that is, the ratio positively (negatively) impacts the online and offline prices in centralized (decentralized) decision-making modes. In contrast, the free-riding rate has the same impacts on online and offline price decisions in different decision modes. More specifically, the free-riding rate has a positive (negative) impact on the online (offline) price in both modes. In addition, we show that the reverse revenue ratio has the same impact on the retail service investment decision under different decision models; that is, the retailer service is positively correlated with the reverse revenue ratio. However, when the free-riding rate is greater than 0.5, the relationship between retail service and the free-riding rate under the centralized model is positively correlated; in other cases, the relationship between the two is negatively correlated under different decision models. We also show that the adjustment space of the price strategy (retail service investment) will be influenced by the combination of the reverse revenue-sharing ratio and consumer free-riding behavior.