Decision making in green supply chains under the impact of the stochastic and multiple-variable dependent reference point

We examine the impact of the stochastic and multiple-variable dependent reference point, under which the members of a dyadic supply chain decide on a product’s green level, wholesale price, and order quantity to improve greening performance. The supply chain consists of a dominant manufacturer and a newsvendor retailer, both of whom may be inequity-averse. Their utility function involves disadvantageous inequity aversion when their trade partner’s profit is regarded as the reference point. Considering the availability of information on the distribution function of market demand, we build an analytical model to derive equilibrium results in three scenarios and then compare them with the results obtained in a normative retailer situation. We show that, in the absence of information on the distribution, for any given wholesale price, the retailer will choose to “under-order” as long as disadvantageous inequity occurs. If the environmental constraint is not binding, the risk-neutral manufacturer will keep the green level unchanged, whereas the inequity-averse manufacturer will reduce it. If the constraint is binding, the manufacturer will increase the green level in response to the reduction of order quantities. As a result, the equilibrium-expected profit of the manufacturer may decrease. The manufacturer can control the impact of the retailer’s inequity aversion by selecting an appropriate combination of wholesale price and green effort level.