Contracting green product supply chains considering marketing efforts in the circular economy era

Abstract

Green product design is an effective instrument for achieving a circular economy. To promote green product development, downstream retailers often enter into contracts with upstream manufacturers and market green products. This study considers a decentralized green product supply chain comprising of a manufacturer and a retailer, who determine the green level of the product and the exerted marketing effort level, respectively. We specifically consider two widely-adopted contracting formats: contracting designing (CD) and contracting marketing (CM). Under CD format, we examine three contract strategies for such the green product supply chain, namely, price-only (Strategy PO), cost-sharing (Strategy CS), and revenue-sharing (Strategy RS) game models. By comparing these strategies, we find that product greening level enhancement can benefit firms when the marketing effort effect is high or low. However, when the marketing effort effect is moderate, product greening level improvement does not necessarily lead to higher payoffs for firms. Furthermore, the equilibrium strategy for the manufacturer and retailer is either Strategy CS or RS depending on certain conditions. Specifically, when the marketing effort effect is low, the manufacturer and retailer prefer Strategy RS. On the contrary, when the marketing effort effect is high, Strategy CS is the equilibrium strategy for the manufacturer and retailer. We also investigate the corresponding contracts under CM format. Interestingly, compared with CM format, the whole supply chain always benefits more under CD format. We further extend to the case that the retailer is risk averse, and the whole supply chain can still be better off with cost-sharing contract under CD format in certain conditions. In addition, we find that the retailer's risk aversion behavior may improve the performance of the whole supply chain under CD and CM formats. Our results not only complement the conventional understanding of supply chain contract theory, but also generate important managerial implications for managers in implementing green operation strategies by choosing the appropriate contracting format and corresponding contract.