The benefit of manufacturer encroachment considering consumer’s environmental awareness and product competition

Abstract

In this paper, we investigate a manufacturer’s encroachment decision in a dual-channel supply chain with substitutable green products. The manufacturer makes green investment and pricing decisions and sells through its own retail store as well as an independent retailer. We make a major contribution by incorporating consumer green awareness as well as product competition into game-theoretic models of the dual-channel supply chain. Specifically, we explicitly analyze the impacts of consumer green awareness and product substitutability on profitability, social welfare, and environmental performance of the supply chain and its firms. Our main findings include the followings. First, with encroachment, higher consumer green awareness and product substitutability always benefit the manufacturer. However, they benefit the retailer only when the manufacturer encroachment cost is sufficiently high. Second, for the green manufacturer, the encroachment strategy can outperform the no-encroachment strategy in terms of profitability, social welfare, and environmental performance. We also employ numerical examples to further illustrate our analytical findings and gain more managerial and policy insights.

Appendices

Appendix

Proof of Lemma 1

Under the no-encroachment strategy, the game is solved using backward induction. At stage 1, solving (6) yields the equilibrium wholesale price $w^{N}$ and green level $g_{r}^{N}$ in the following:

$w^{N} = \frac{a}{2} + \frac{{3Ht^{2} }}{4}$, $g_{r}^{N} = tH$.

Plugging these values of $w^{N}$ and $g_{r}^{N}$ into Eq. (5), we thus obtain the equilibrium retail price:

$p_{r}^{N} = \frac{{3a}}{4} + \frac{{7Ht^{2} }}{8}$.

Substituting them again into (4) and (6), we have the equilibrium profits:

$\Pi _{m}^{N} = \frac{{(2a + Ht^{2} )^{2} }}{{32}}$ and $\Pi _{r}^{N} = \frac{{(2a + Ht^{2} )^{2} }}{{64}}$. □