Coordination mechanism of dual-channel closed-loop supply chains considering product quality and return

Abstract The deficiency of green products from a quality perspective has attracted significant attention from consumers. The recurring explosions of smart cell phone batteries in recent years is why green products are deemed quality-deficient. However, few researchers has paid attention to this issue, and there is no consensus in the previous literature regarding the impact of returning defective products on vertical dual-channel management in closed-loop supply chains. According to past studies, there are two types of product returns: 1) defective item return and 2) waste product return. The model in our study is based on these two types. However, available studies are not based on this model. Second, we examine how closed-loop supply chain members determine the product quality and price in the presence of return on defective items. Based on our results, we design a revenue-sharing contract to motivate retailer's efforts in recycling waste products. Our paper demonstrates the effectiveness of the proposed coordination mechanism in mitigating retail price competitions and enhancing the total profit of dual-channel closed-loop supply chains, compared to non-coordination models. In addition, we also provide a practical managerial insight indicating that it may not be wise to pursue a low return rate for faulty products by making expensive quality improvements, and the increased quality may even worsen the entire supply chain in some scenarios.