Green channel coordination under asymmetric information

The increased environmental awareness of consumers has led supply chains (SC) to green their operations. To extract a higher portion from the expanded demand due to greening activities, SC parties may hide key information regarding their green activities. This paper investigates the channel coordination problem in a green SC consisting of a manufacturer who sells a green product through a retailer. Both parties may involve in greening operations to expand an environmental-aware market; however, the retailer is privy to the information about his green sales effort. The analysis of the first-best outcome characterizes the conditions for (i) hold-up problem under which the retailer benefits from free ride on the manufacturer's greening operations effort, (ii) commitment strategy from the retailer to cover for the market expansion due to the manufacturer’s underinvestment in greening operations, and (iii) synergy in greening efforts. We then solve for the optimal incentive contracts under asymmetric information. Our analysis suggests that the manufacturer can include her greening effort in the contract to work as an incentive-fee; the higher level of greening effort by the manufacturer incentivizes the retailer to increase his green sales effort. We also show that the wholesale price term works as a screening tool to avoid the low efficient retailer from mimicking the high efficient one. Finally, we show that information asymmetry reduces the social welfare in a green market; it leads to a higher market price and a lower greening effort level.