The peril of distribution channel integration with environmental quality under supply chain competition

This study analyzes vertical channel integration versus decentralization with products of different environmental quality under supply chain competition. We first examine the strategic impact of different channel structures on environmental quality, firms’ profits, and welfare. Specifically, we analyze and compare different channel structures: no integration (decentralization), ordinary product channel integration, green product channel integration, and full channel integration. It is found that more channel integration will cause more intense competition in terms of environmental quality decisions between the manufacturers and thus lower profits. Therefore, the manufacturers always prefer decentralization over integration in equilibrium, which also constitutes a win-win distribution channel strategy compared to integration. Moreover, compared to vertical decentralization, channel integration does not necessarily increase the products’ environmental quality in the market. Furthermore, we include two practical applications of the main model to study the interaction between channel strategies and production emissions with common emission regulation policies in practice: emission tax and emission reduction subsidy, as well as generalize the main model to examine multiple extensions including different consumer density, different efficiencies, sequential market competition, balanced objectives, cross-selling, and partial market coverage.