Ethical fashion supply chain operations: product development and moral hazards

Abstract

Corporate social responsibility (CSR) is critical. As a part of CSR, fashion companies have to decide whether to be ethical or not during the product development process. Motivated by real-world practices, we conduct a gametheoretic modeling analysis and derive the firms’ optimal decisions (including ethical operations (ETO) adoption, pricing, and product greenness level) in fashion product development. We identify a key moderating factor which governs how an increase of basic market demand significantly affects the optimal product greenness level and how an increase of basic production cost influences the optimal retail price. Furthermore, we find that there is a threshold that plays a critical role in determining whether the optimal retail price and product greenness level are higher or lower with the adoption of ETO. We prove that when the fixed payment from the retailer to the manufacturer under the ETO case is set to be sufficiently small, the retailer prefers to adopt ETO and requests the manufacturer to follow. We propose three practical measures (including the use of technologies) to help encourage the supply chain members to invest in ETO willingly. We finally consider the probable occurrence of moral hazard problems and explore the managerial implications.