Greening and price differentiation coordination in a supply chain with partial demand information and cannibalization

In this paper, a supply chain coordination problem for a single manufacturer and retailer for a single selling period is analyzed. The retailer in the supply chain offers two products, an inaugural green and a regular product at different prices. These products are procured at distinct wholesale prices through a single distribution channel. The inaugural green product is offered by the manufacturer along with the existing regular product and sold at a higher price compared to the regular product. This price differentiation divides the market into two segments where the demand in each segment can be controlled using a differentiation price. However, this segmentation resulted via price differentiation is often imperfect owing to which the retailer experiences cannibalization. Cannibalization is perceived as demand leakages between the two segments. This study proposes mathematical models for single channel coordination that integrate price differentiation and demand leakage aspects for the two-product case of green and regular products. Coordination is modeled for both integrated and decentralized channels. In an integrated channel, the decisions are centralized in a monopoly, whereas, in the decentralized channel, manufacturer and retailer decisions are coordinated in a leader-follower game theoretic setting. The coordination models are developed not only for deterministic demand and stochastic demand with full demand information but also for stochastic demand with partial demand information. For each of the demand situations, analytical (closed-form)solutions for pricing, inventory, and greening effort investment decisions in the supply chain are developed. A detailed numerical study is proposed to illustrate the proposed models. We show that selling green and regular products at differentiated prices can significantly improve the profitability of both the manufacturer and retailer, however, an increased demand leakage can considerably limit the profitability gains. Whereas, manufacturer's decision on price differentiation can be used to mitigate the adverse effects of demand leakages.