Towards sustainable development: Optimal pricing and sales strategies for retailing fair trade products

Abstract

In response to heightened pressure from customers who embrace sustainability, and in compliance with the Sustainable Development Goals set by the United Nations, an increasing number of organizations have implemented, mostly within their supply chains, initiatives to reduce their environmental impacts while enhancing their social responsibilities and economic well-being. As such, offering Fair Trade (FT) alternatives on their shelves provides an opportunity for retailers to better connect with and support their suppliers in the developing world by guaranteeing higher purchase prices, and enhanced education and well-being. This could be achieved by transitioning to or integrating with a FT Supply Chain (FSC). To that end, this paper studies, from the perspective of a profit-maximizing and socially-aware retailer who wants to expand its conventional product (C-product) offering by adding an FT option (F-product), the conditions under which the two competing products (F- and C-products) can be optimally priced and allocated to the available storage capacity. Our demand model segments the market with respect to customers’ willingness to pay a higher premium for the F-product relative to the C-product, and their derived utilities. We formulate the optimization model as a convex mathematical program. To showcase the use of the optimality model, various numerical experiments are conducted to investigate the sensitivity of key parameters. To further stimulate discussion and productivity in sustainable supply chain literature, and due to their salient operating structure of FSCs, such as licensing fees, we deliberately expand on the historical background of FT, and delineate FSC from its conventional counterpart CSC. Our results show that FSCs and CSCs can be well-aligned if demands for both F- and C-products are not cannibalized, and that the retailer is willing to invest in enhancing its social responsibility profile. Among others, our model informs managers about how to use pricing as a leverage, and when to sell only F-, or C-product, or a mix of both. The results confirm that it is possible to design sales strategies for the retailer such that its financial-bottom line is still not hurt while FT suppliers and workers in developing countries could benefit from high premiums from the sales of F-products, for a sustained income in disruption-prone working environments.