Product line design and quality differentiation for green and non-green products in a supply chain

Abstract

Motivated by the real practices in the circular economy, this paper aims to identify optimal product line design for green and non-green products in terms of quality differentiation. We develop a price and quality driven consumer choice model in a two-echelon supply chain through using a game-theoretical approach. Our study shows that no matter how high or low the product quality difference is, when the consumers’ willingness to pay (WTP) for responsibility is relatively low, a single product line strategy will be prioritised over a two-product line strategy; whereas when the consumers’ WTP for responsibility is relatively high, a two-product line strategy is more desirable. Moreover, we find that enhancing product quality could increase consumer welfare and reduce environmental impact. Only when green and non-green product quality difference is large enough, designing and selling green products is beneficial to consumers, brings the slightest pressure on the environment, and generates the highest social welfare. Furthermore, we extend the model by introducing a simplified contract and find that a simplified contract is not able to increase the manufacturer's profit, but may increase the retailer's profit and consumer surplus as well as generate better performance in environmental protection and social welfare.

Keywords:

• product line design
• quality differentiation
• green product
• supply chain
• game theory
• circular economy

Acknowledgement

Bin Shen sincerely thanks TUM School of Management, the Technical University of Munich for hosting him as the Humboldt Fellow.

Disclosure statement

No potential conflict of interest was reported by the authors.

Supplemental data

Supplemental data for this article can be accessed at https://doi.org/10.1080/00207543.2019.1656843.

Notes

1 In our paper, we consider petrol cars are non-green and hybrid/electronic cars are green.

2 Here we use the automotive industry as an example, but the co-existence of green and non-green products is also true in other industries such as food, fashion, and home appliance.

Additional information

Funding

Bin Shen is partially supported by National Science Foundation of China [grant numbers 71871051, 71832001] and Alex von Humboldt Foundation.