Donating to a good cause: Optimal coordination design of a dyadic supply chain with socially aware consumers

Abstract

Socially aware consumers care about giving to a good cause through their purchases. In reality, though, while some consumers respond favourably to companies' social responsibility initiatives, others apprehend because they do not trust the company or the effectiveness of the cause. That variability in consumers’ perceptions and purchase decisions inevitably adds to demand uncertainty. This paper studies the optimal design of a coordination mechanism for a socially responsible dyadic supply chain (SC) with a manufacturer supporting a cause-related marketing campaign (CMC) and a retailer selling to socially aware consumers. Unlike in pertinent literature, we take demand as uncertain due to consumers’ diverse and unpredictable responses to announced CMC. In a Stackelberg game setting, we determine the optimal donation size (a percentage of the selling price) for the manufacturer and the retailer’s optimal order size. We show that a two-part tariff (TPT) contract coordinates the SC. The numerical experiments demonstrate that the proposed TPT contract incentivizes the manufacturer to reach out to socially aware consumers by pledging to a charity. We also show that the proposed coordination model can achieve a Pareto-improving solution.