Fair but Risky? Recycle Pricing Strategies in Closed-Loop Supply Chains.

Jianhong He,Lei Zhang,Fu-Sheng Tsai,Xiao Fu

doi:10.3390/ijerph15122870

Abstract

We argue that a Nash bargaining model with behavioral factors (i.e., fairness concern and risk aversion) should be introduced to the price strategizing process in the context of a closed-loop supply chain. We consider three different pricing models: The first is when both the manufacturer and the retailer have fairness concerns; the second is when both the manufacturer and the retailer have risk aversion; and the final is when the manufacturer has risk aversion but the retailer has both risk aversion and fairness concern. Then we examine the model with game theory. The results have shown that fairness and risk aversion change the optimal pricing strategy, which affects the expected profits of retailers and manufacturers. The impacts of two (relatively irrational) behavioral factors on the wholesale and retail prices of new products, the recycle price and recycle transfer price of the waste products, are not the same. For new products, the wholesale price is most affected by behavioral factors and the sales price scores second. For waste recycling products, the transfer price is most affected by behavioral factors and the recycle price scores second. When considering fairness and risk aversion in retail, fairness concern is good for both manufacturers and retailers. This innovative pricing strategy model adds implications for sustainability in supply chain operations.

Highlights

A closed-loop supply chain(CLSC)refers to a supply chain system that incorporates reverse logistics and supports product recycling and life cycle management, which is more environment-friendly [1,2]
The stronger the manufacturer’s concern for fairness, the more likely it is for the manufacturer to increase the wholesale price and to decrease the recycle and transfer prices which in turn increases their proportion of profits in the supply chain
Corollary 1 shows that only when the manufacturer has fairness concerns should the optimal wholesale price of manufacturers be under that of the rational optimality. It shows that when both sides have fairness concerns the optimal recycle and transfer prices should be higher than that of the rational optimality. This is because the bargaining power of manufacturers is starkly weakened only when retailers show fairness concern behaviors, so manufacturers tend to reduce the wholesale prices and raise the recycle and transfer prices, which increases the retailer’s profits

Summary

Introduction

A closed-loop supply chain(CLSC)refers to a supply chain system that incorporates reverse logistics and supports product recycling and life cycle management, which is more environment-friendly [1,2]. As a pricing strategy of a closed-loop supply chain, studies have shown that the retailer recycling model is more effective than both manufacturer recycling and that of a third-party [3]. Emergent studies have focused on the differentiated pricing strategies of new products and remanufactured ones in closed-loop supply chains [4]. Being absolutely rational is is usually impossible forfor decision makers in in closed-loop supply chain [10,11]. W pis isthe wholesale price of new products and remanufactured products sold by the the price of the waste when a retailer recycles it from the consumer, the retailer’s r manufacturer to the retailer, the manufacturer’s decision variable. Pr is the price of the waste when a retailer recycles it from the consumer, the retailer’s decision variable.

No Fairness Concern or Risk Aversion

When Fairness Concerns Exist for Both Manufacturers and Retailers

When Both Manufacturers and Retailers Have Risk Aversion

Data Simulation

The effects of the aversion coefficient fairness concern coefficient

Conclusions