Game theoretical analysis in two-echelon sustainable supply chains to manage and coordinate strategic decisions

Abstract

Business firms and consumers are increasingly and rapidly realizing the benefits of adopting environmental responsibility. The business firms stress including it in their supply chain strategy and/or operations. This paper explores the environmental consciousness and quality attentiveness of consumers in a supply chain. Demand for the product depends on its price, eco-friendly level, and quality of the product. Three decentralized models are developed under three different game theoretical settings. A comparative study of the three game-theoretical models reveals several characteristics. It determines conditions under which channel members can decide the policy for the best possible benefit. The present work explores the effect of customer environmental awareness on the optimal decision. Production of eco-friendly items is also the prime consideration of our paper. It reveals that the manufacturer gets the most profit in the manufacturer Stackelberg game model, but the retailer gets the maximum profit from the retailer Stackelberg game model. Although channel members prefer their leading position to make the game theoretical decision-making process, the most decentralized channel profit is obtained from the Nash game model. Thus, consumers will also benefit, and the best channel profit can be obtained if the channel members agree to make decentralized decisions using the Nash game model. The centralized channel profit outperforms all three decentralized channel profits. The paper applies the concepts of sub-game perfect equilibrium and alternating offer bargaining to coordinate the channel and distribute surplus profit. Finally, analytical results are verified using numerical examples.