Pricing and quality competition for substitutable green products with a common retailer

This study explores two competing manufacturers’ green investment decisions with different market sizes in selling price- and green-level-differentiated substitutable green products through a retailer. Five game structures are considered in examining the impacts of power structures on the optimal price and green level decisions and the corresponding equilibrium decisions. A two-way revenue-sharing contract is proposed from the perspective of improving the performance of each member. Numerical experiments are conducted to illustrate the results and gain managerial insights for green product manufacturing and selling in a competitive market. The results demonstrate that the two competing manufacturers need to cooperate rather than compete if cross-price elasticity or the difference between market potentials is too high. In this scenario, the equilibrium outcome can outperform the overall green supply chain’s performance compared to those achieved under the Bertrand or Nash game. The retailer also receives benefits. Due to a higher variation in market size and price sensitivity, the retailer may receive higher profits under the manufacturer’s leadership and vice versa. Therefore, the results contradict the common consensus. Although greening levels remain higher if the retailer dominates or the members have equal power, every member can receive suboptimal profits in these scenarios. It is found that a two-way revenue-sharing contract mechanism based on product market sizes can improve the overall green supply chain’s performance and allocate profit surplus arbitrarily.