A mathematical model for green supply chain coordination with substitutable products

Abstract This paper investigates the green channel coordination issue within a two-stage supply chain (SC). The investigated SC sells a non-green traditional product and also plans for releasing a new substitutable green product beside the current traditional product. Demand for both products is a function of the retail price as well as products’ green quality and retailer’s sales efforts. Both retail price and sales effort level for the green product are decided by the retailer while the product green quality is the manufacturer’s decision variable. Three decision scenarios are modelled and compared: (1) decentralized scenario where each member decides independently based on own profit, (2) integrated scenario where there is a one decision maker in the system, and (3) collaborative scenario that aims to enhance the overall channel profit subject to Pareto improvement for each member. Closed-form expressions of optimal retail price, sales effort and green quality are derived for the first two scenarios, and a mathematical programming model is developed for the collaborative scenario. Our numerical investigations revealed that the proposed collaboration model is capable of enhancing the SC profit fairly close to the centralized model and also ensures higher profits for both channel members than the decentralized decision making.