A manufacturer’s responsible sourcing strategy: going organic or participating in fair trade?

We consider a bilateral supply chain with a downstream manufacturer and an upstream farmer. The manufacturer makes two sourcing decisions: Whether to join the fair trade movement and whether to use organic or conventional (non-organic) cotton in her product. The manufacturer’s sourcing strategy affects the determination of the wholesale price, the farmer’s production cost, and consumers’ purchasing decisions. We characterize the supply chain parties’ subgame perfect Nash equilibrium decisions, finding that the manufacturer participates in fair trade or uses organic cotton only when the non-organic cotton commodity price is sufficiently high. Moreover, increases in the cotton commodity price may not necessarily benefit the farmer. Finally, the manufacturer’s participation in fair trade can yield the highest profit for both supply chain parties. Such a win–win outcome always occurs when the fair trade manufacturer also chooses organic cotton but never occurs if the manufacturer does not participate in fair trade.