Greening products in a supply chain under market segmentation and different channel power structures

Abstract

This paper investigates product line expansion in which a green version of an existing conventional brown product is launched. We use a game-theoretic approach to study a supply chain consisting of one retailer and one manufacturer, either of which can be the leader of the supply chain. Our model assumes a market segmented based on the consumers’ willingness to pay for the green feature of the product and incorporates a fixed cost related to launching the green product. Through our analysis, we define four pricing and positioning strategies for brown and green products. We explicitly express the conditions under which it is more profitable to expand the conventional product line with a green product and determine the region where each pricing strategy applies in the centralized system as well as in the two decentralized systems with each member as the leader of the supply chain. Our results also show that a manufacturer-led supply chain is better prepared than a retailer-led supply chain to overcome the fixed cost, launch the green product, and grasp benefits from the growth of the green consumer segment at an early stage of its development. We design two coordination mechanisms that allow the decentralized supply chain to achieve its first-best performance.