Role of power imbalance on channel coordination under greening investments

Power imbalance across echelons in a supply chain impacts the supply chain efficiency. Whenever the final demand depends on price and greening effort, which entity taking the greening decision, may become a conflicting issue. In this work, we investigate a two-echelon supply chain comprising a manufacturer and a retailer, when the product demand depends on both the selling price and the greening effort. Investment decisions in the greening can be made either by the manufacturer or by the retailer or even through collaboration under either cost-sharing or revenue sharing contracts. We analyze the investment in greening as Stackelberg leader–follower games. In particular, manufacturer-dominance and retailer-dominance scenarios have been considered. The analysis shows that the leader always finds it optimal to impose an investment cost burden to the follower firm. However, the follower firm and the supply chain are always better-off when the leader is responsible for greening investment. Thus, investment decisions under the dominance of supply chain members create channel conflict, and when channel leadership is endogenous, opting for the leadership becomes the only Nash Equilibrium, which is a similar case as the Vertical Nash model. The resolution of this conflict is explored through the performance of cost-sharing and revenue sharing contracts. Eventually, we find that both the contracts in isolation are unable to coordinate the supply chain. Interestingly, a hybrid contract can coordinate the supply chain whenever the proportion of the revenue retained by the retailer equals the proportion of the green-cost invested by the retailer.