Supply Chain Decisions Considering Heterogeneous Consumer Greenness Preference and Reservation Utilities

Supply Chain Decisions Considering Heterogeneous Consumer Greenness Preference and Reservation Utilities

YuHang Zhang (College of Economics and Management, Nanjing University of Aeronautics and Astronautics, Nanjing, China) and Ying Wang (College of Economics and Management, Nanjing University of Aeronautics and Astronautics, Nanjing, China)
DOI: 10.4018/IJISSCM.2019010101

Abstract

This article focuses on how the prices set by supply chains and the product greenness level changes when there exists a difference for consumers in both their greenness preference and their reservation utility for the common product with minimal greenness, based on a two-dimensional model which is built and the market is partitioned into four groups. In this study, the authors use the Stackelberg game model to analyze the decisions of a two-stage supply chain, providing environmentally friendly products affected by a consumer greenness preference which is represented by the willingness-to-pay (WTP) for product greenness. The authors found that manufacturers may lower the product greenness level with the decrease of the valuation of consumer's WTP for product greenness, but he may prefer keeping the same product greenness, he will even improve it, when there is a reduction in reservation utility for the traditional product. Moreover, this article shows that there is different impact for different combinations of both WTP for product greenness and product greenness level (different market segmentations) on price decisions of the manufacturer and retailer. In consideration of the asymmetric information about consumer's utility and willingness to pay between manufacturer and retailer, the authors introduce the bargaining power into the study, and then they conclude that during the different market segmentations, the wholesale price and retail price go down as a retailer strengthens his bargaining power, and increasing sales volume can improve profit to make up for a loss in retail price.
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1. Introduction

The environmental pollution problem has become more and more serious. A great deal of pollutants are created from the process of manufacturing and using, such as automobiles and home appliances. In the meantime, an increasing number of consumers pay attention to protecting the environment (Hartman Group, 2007), this will lead to changes in purchasing behavior of consumers who prefer to purchase green products. OECD (2002a) points out that twenty seven percent of consumers in OECD countries can be regarded as “green consumers” or “environmentalists” on account of their strong preference for green products and positive environmental activism. The BBMG Conscious Consumer Report indicates that 67% of American consumers are willing to buy the products which can benefit environment and 51% prefer to pay more for products with high greenness level, i.e. the products with friendly impact on the environment (Bemporad & Baranowski, 2007; Barksdale, 2009). European Commission (2008) studies the consumers’ behavior responding to environmental protection, and finds that 75% of European consumers prefer to purchase environmentally friendly products even though the price of this type is higher than that of the not environmentally-friendly products which are purchased by 31% of Europeans. Although the consumer spending is slower throughout the economy in the US, the consumption of natural products increased by 25% from 2006 to 2008 (Mintel, 2009).

The cost of producing green products is higher than that of creating conventional products, resulting in the product price is high (Conrad, 2005). For example, the report of Toyota indicates that the price of hybrid-cars, which can cut down on carbon emissions by nearly 3.5 million tons by the end of April 2007 (Yakita, 2009), are more than 1.5 times that as much of the gasoline powered ones. The key issue that determines the strategic direction (producing green products or traditional products) of supply chain players is whether consumers prefer to pay more to cover the additional green costs. Moon et al. (2002) show that a strong preference for purchasing green products will lead to a significant effect that the higher the extra payment for greenness is, the more producers convert to adopt environmentally friendly techniques. This paper assumes that the cost of green product is an increasing function of greenness level. Based on this assumption, we analyze the impact of consumer’s WTP for green product on the strategic decisions of centralized supply chain and members of decentralized supply chain, considering different market segmentations.

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