Manufacturer’s Encroachment Strategy with Substitutable Green Products

Abstract This paper investigates a dual-channel supply chain where a manufacturer sells substitutable green products to its downstream subsidiary as well as an independent retailer. Most research in the literature assumes centralized encroachment, where the manufacturer makes all decisions for the subsidiary. In this paper, we make a major contribution by considering decentralized encroachment, a business practice where the subsidiary decides on pricing and/or quantity to maximize its own profit. We make another contribution by considering competition and consumer’s green awareness. Our major findings are as follows. First, compared with centralized encroachment, decentralized encroachment is more beneficial to the manufacturer, but it makes the retailer worse off. Second, a profit-sharing contract can be employed between the manufacturer and its downstream subsidiary so that the both can benefit from the decentralized encroachment strategy. Third, under either centralized or decentralized encroachment, consumer’s higher green awareness always benefits the manufacturer as well as the retailer. As product substitutability increases, the manufacturer will always benefit while the retailer can benefit only when the direct selling cost exceeds a threshold. Fourth, the manufacturer’s decentralized encroachment can also improve the environmental performance and social welfare for the supply chain. Finally, we conduct numerical experiments to further illustrate our analytical findings and gain more managerial insights.