International Journal of Production Economics: Arka Mukherjee, Margarida Carvalho

Int. J.
Production Economics 241 (2021) 108270
Contents lists available at ScienceDirect
International Journal of Production Economics

journal homepage: www.elsevier.com/locate/ijpe
Dynamic decision making in a mixed market under cooperation:

Towards sustainability
Arka Mukherjee *, Margarida Carvalho
CIRRELT and Département d’informatique et de Recherche Opérationnelle, Université de Montréal, Montréal, Quebéc, H3T 1J4, Canada
A R T I C L E I N F O A B S T R A C T
Keywords: Sustainability goals are becoming a priority in many societies. An important element in this context is the success
Differential game theory of environmentally friendly products. Hence, we consider a manufacturer-retailer vertical supply chain model,
Mixed market managing a green product and its conventional counterpart, designated by brown product. We analyze three
Coordination
kinds of dynamic market scenarios: no market leadership, the manufacturer as the market leader, and the retailer
Green supply chain
as the market leader. Under each scenario, we determine the equilibrium decisions for pricing and greening
investments as well as their dependence on a cost-sharing proportion agreement between the firms. We find that
generally both firms have similar pricing trends, where the gap between the two product prices increases with
the share of cost carried by the retailer. Moreover, we analyze how these decisions affect the consumer surplus
and the performance of the firms. The absence of a market leader leads to higher consumer surplus with the
manufacturer investing more in greening. However, cost-sharing may fail if there is no market leader. The
retailer has incentive to share the highest proportion of greening costs when it is the leader. When the manu
facturer is the leader, the retailer may have incentive to change the cost-sharing proportion over time. Finally, we
compare the greening level and learning trajectories for the different scenarios. We provide essential managerial
insights on how decisions should be operated, enabling green products to successfully gain a stable market share.
1. Introduction announced investments on sustainable packing (Nestlé, 2020). Such

examples are abundant in many industries. Nowadays,
Adopting sustainable environmental practices has become the norm environmental-friendly practices are enforced or encouraged by the
among manufacturers and retailers in recent years. Firms have felt the government and sought by firms as a tool for competitive advantage. For
urge to invest in green practices with the burgeoning consumer interest instance, plans on the ban of combustion vehicle sales have been re
in environmentally friendly products. However, the conventional ported (Ambrose, 2020; Lampert, 2020)).
counterparts of the green products, which we refer to as brown products, Environmental-friendly manufacturing is costlier than traditional
capture most of the market. Electric vehicles and their gasoline-fueled production (Walley and Whitehead, 1994). As a result, the prices of
analog, food items with green packaging or organic food items and green products are frequently much higher than the respective brown
their traditional equivalents are some examples of coexisting green and versions. Therefore, green products are usually tagged with a price
brown products. Moreover, major retailers usually sell both green and premium. A study by the US-based firm Nielsen Holdings (Nielsen,
brown products. For example, Walmart sells organic yogurt as well as 2018) indicates that the green product demand has shown steady
conventional yogurt. Additionally, manufacturers may produce both growth in the past few years and it is projected to hold the trend in the
types of products. For instance, many carmakers (e.g. BMW, Volkswa coming years. Nielsen’s report illustrates the expanding market share of
gen, Audi) have electric/hybrid and internal combustion engine vehicle green products and the shrinking of the same for brown products. More
options. It has been shown that investing the improvement of electric specifically, in the years between 2014 and 2017, the total store sales of
vehicles’ recharging time and range is crucial for increasing their market sustainable products have gone up from 22% to 25%. The projected sales
share (Ziegler, 2012; Hackbarth and Madlener, 2013; Axsen et al., also show that similar stable growth is likely in the coming years. Thus,
2015). On the food industry side, we have the example of Nestlé that has there is a clear indication that the buyers of conventional brown
* Corresponding author.
E-mail addresses: arka.mukherjee@umontreal.ca, arkamukherjee80@gmail.com (A. Mukherjee), carvalho@iro.umontreal.ca (M. Carvalho).
https://doi.org/10.1016/j.ijpe.2021.108270
Received 16 February 2021; Received in revised form 6 August 2021; Accepted 13 August 2021
Available online 19 August 2021
0925-5273/© 2021 Elsevier B.V. All rights reserved.
A. Mukherjee and M. Carvalho International Journal of Production Economics 241 (2021) 108270
products are attracted to the sustainability quality of the green products develop feedback strategies of pricing and greening investments which
and are willing to pay more. have the advantage of providing strategies that are not pre-committed.
The prospect described above is promising in terms of the shopping In this way, at any given point of time, the firms can react to exoge
behavior impact on the environment. Nevertheless, the price, one of the nous effects on greening or learning, and adjust their optimal strategies.
main factors determining product purchase, is still an obstacle that can A recent literature review by Agi et al. (2020) suggests that research is
hinder the growth of green product sales. Many consumers have the scarce in this area of dynamic management of green supply chain de
intention to buy green products but cannot do so because of the exor cisions. We contribute in this direction.
bitant prices of some environment-friendly products (Benveniste, 2019). Our paper is organized as described next. Section 2 comprehensively
The above discussion reflects the three primary elements that can revises the related literature. Section 3 formulates our differential game.
determine the consumers buying preferences between a green and a In Section 4, we compute the equilibrium strategies for all scenarios and
brown product. These are their respective prices, and the sustainability we derive a series of theoretical results that allow us to analyze them and
appeal of the green product. These preference determinants pose some the associated consumer surplus. In Section 5, we investigate the
challenges for the contemporary market, especially for manufacturers sensitivity of the game outcomes to the parameters of the model through
and retailers selling them simultaneously. Consequently, the firms numerical experiments. Lastly, Section 6 summarizes our contributions,
involved in the supply chain have important decisions to make con their managerial implications, and provides future research directions.
cerning product pricing and greening investments. Such decisions
depend on multiple factors typically driven by the consumer behaviors. 2. Literature review
Therefore, we consider a dynamic supply chain where a manufac
turer produces both a green and a brown product and the same are sold In this article we integrate several key themes in the green supply
via a retailer. We consider the dynamic price and green investment chain literature. These are: (i) markets with a green product, (ii)
decisions of the manufacturer and the retailer. The consumer’s charac greening level and price-sensitive consumer demand, (iii) dynamic de
teristics that we model are price sensitivities and the attractiveness of cisions, (iv) cost-sharing, (v) cost-benefit with learning from green de
green quality towards brown and green consumers. The manufacturer’s mand and (vi) green and brown consumer surplus. Many articles in the
attributes affecting our study are learning (thereby reducing greening intersection of the above key themes have discussed horizontal
costs), greening level (quality), and the retailer’s cost-sharing policy for competition (e.g. manufacturer to manufacturer competition with
the green product. More precisely, our research questions are the respect to price, greening level or environmental parameters) or vertical
following: cooperation (e.g. cost-sharing contracts, government subsidy or other
supply chain contracting). Following the six themes above, next, we
RQ1: What are the dynamic equilibrium strategies for the firms? review the literature for which a summary can be found in Table 1
RQ2: How does market leadership affect the pricing and greening together with our contribution.
strategies of the firms? Markets with a green product. In the mathematical modeling litera
RQ3: What is a mutually beneficial greening cost-sharing proportion ture, several studies analyze different decision variables like price,
provided by the retailer? greening efforts, sales effort, cost-sharing, and firm performance in
RQ4: How are the firms’ profits and consumer surplus affected by the green and green-brown markets as we review next. Some studies do not
market leadership? explicitly name the products as brown and green but the essence of a
mixed product market remains the same. For example, Zhang et al.
We use differential game theory to capture in our mathematical (2015) refer to brown and green products as traditional and
model the inter-temporal decisions and the evolution of greening level environment-friendly, respectively. In this context, we start by
and learning of the firms over time. All the components of our model are describing the literature without any game theoretical (strategical)
dynamic, contrasting with most of the extant literature built on static concerns and then, we focus on work investigating coordination and
games. There are several advantages to using a differential game over a competition.
static one. Contrary to static game models, in a differential game model, Under a manufacturer’s perspective, while examining the green-
we capture and analyze how strategies should change over time in order brown production quantity decisions under capacity constraints, Yeni
to be optimal. This is more realistic as a firm does not take a decision pazarli and Vakharia (2015) show that they can use a two-level pricing
once but rather it changes the decisions based on available information, approach and counteract product cannibalization. The authors also posit
technology, competition, and so on. The importance of considering a that the greening level of a product can take brown products off the
differential game can be illustrated by the following example. The sales market. According to Yenipazarli and Vakharia (2017), better economic
of electric vehicles developed manifold from 2011 to 2019 but the price and environmental performance can be achieved simultaneously when a
did not drop in the European and western markets. For example, the manufacturer uses different strategies for different consumer segments.
sales of Renault Zoe increased from 13 units in 2012–45,129 units in Still under a monopolistic manufacturer but within a dynamic model,
2019 (Demandt, 2021), but the price of the car increased from 22,500 Mukherjee and Carvalho (2020) examine the optimal pricing and green
euros in 2012 to 26,580 euros in 2019 (Munoz, 2019) with an investment decisions under a demand sensitive to product prices and
improvement on its charging time. We show that this is consistent with greening level. We extend this model through a retail price-sensitive
our model where price and demand of the green product increase and at demand and incorporate an additional channel member, the retailer.
the same time the greening level (improvement level of charging time) Coordination between a manufacturer and a retailer in a green
also increases. Further examples from the electric vehicle industry market is discussed in Zhang et al. (2017). They investigate how equi
include that of e-Golf in Germany and of Leaf in the UK. Improvements librium pricing and green innovation decisions are obtained in a green
in power, charging time and range, are some of the examples of greening product market under vertical integration, a two-part tariff, and a Nash
level dynamics that evolve with learning from experience. Indeed, we bargaining. Withing a mixed market, Basiri and Heydari (2017) examine
2
Table 1
Key components of the related literature and comparison with our paper. In the unit of analysis’ column, M denotes manufacturer, R denotes retailer, S denotes supplier
and G denotes government. In the market leadership column, N denotes a market where all players have equal power, MS denotes manufacturer leadership, RS denotes
retailer leadership and GS denotes government leadership.
Paper Decision variables Unit(s) of Coordination mechanism Learning Market Dynamic Mixed
analysis leadership model Market
Chen and Sheu (2009) price, recycle ability M (many) ✓

efforts
Peng (2013) price, subsidy M-M-G government subsidy GS ✓ ✓
Yenipazarli and production quantity M ✓ ✓
Vakharia (2015)
Zhang et al. (2015) order quantities M-R vertical integration N ✓
Basiri and Heydari price, sales effort, M-R vertical integration N ✓
(2017) quality
Yenipazarli and price, quality M ✓
Vakharia (2017)
Zhang et al. (2017) price, green innovation M-R vertical integration, two-part tariff, N ✓
Nash bargaining
Hong et al. (2018) price M-M ✓
Zhou (2018) price M-M ✓
Zhang et al. (2018) margin, price, energy M-R cost sharing ✓ MS, RS ✓
efficiency
Zhang et al. (2019) greening level, price M-R two-part tariff contract N ✓
Dong et al. (2019) price M-R N
Liu et al. (2020) price, investment M-R revenue sharing, cost-sharing MS, RS ✓
Zhang et al. (2020) price M-R MS ✓
Mukherjee and Carvalho price, greening efforts M ✓ ✓ ✓
(2020)
Our paper price, greening efforts M-R cost sharing ✓ N, MS, RS ✓ ✓
how a manufacturer and a retailer can gain from coordination in a investigate revenue sharing and cost-sharing contracts in a
market where prices, sales promotions, and greening level influence manufacturer-retailer supply chain. The authors find that the firms’
demand. The authors show that a coordinated approach can yield profits profitability under each contract varies depending on the market lead
close to a vertically integrated scenario. ership scenarios – manufacturer or retailer as the leader.
There are also works that analyze competitive settings between only Greening level and price-sensitive consumer demand. As far as the green
manufacturers and both manufacturers and retailers. Using a static supply chain literature is concerned, there are different classes of de
game-theoretic model, Hong et al. (2018) consider pricing decisions mand functions. Some consider only price competition between green
under consumer environmental awareness (CEA) and non-green (tradi products, while some consider price competition between green and
tional) product reference. The authors vouch for differential pricing brown products, e.g., Yenipazarli and Vakharia (2015); Hong et al.
strategies for different levels of CEA. Another interesting study (Zhou, (2018); Zhou (2018); Dong et al. (2019). Another body of research as
2018) considers competition between a green product manufacturer and sumes that the green quality or greening level is a measurable attribute
a brown product manufacturer. According to it, a green consumer base that positively impacts the demand of a product (Ghosh and Shah, 2015;
can be profitable for both the firms, but intense competition and a large Ghosh et al., 2020; Hong and Guo, 2019; Zhu and He, 2017; Liu and De
green market can have negative environmental implications. Studies Giovanni, 2019; Basiri and Heydari, 2017; Li and Li, 2016; Mukherjee
such as Zhang et al. (2019); Dong et al. (2019) advance the under and Carvalho, 2020). We adopt the demand function provided in
standing of the manufacturers’ product choice. Zhang et al. (2019) show Mukherjee and Carvalho (2020) with the difference that in this paper,
that the manufacturer chooses a product based on the investment to the demand is realized at the retailer’s end instead of the manufacturer’s
value ratio and production cost. They also find that a two-part tariff end, and therefore the demand functions are retail price and greening
contract can incentivize the manufacturer to produce green products. level sensitive. We explain later how this difference influences our
Dong et al. (2019) conclude that the manufacturer should invest in green findings. The presence of evolving greening level and learning states as
product development (GPD) for better long-term profits. A retailer’s well as prices as dynamic decisions makes our demand dynamic too.
investment in GPD reduces the wholesale prices and thus can be a Dynamic decisions. From the industry report by Nielsen (2018), we
profitable strategy for the retailer. The study was done in a static setting emphasized the importance of an evolving market for green products.
but it considered decisions in two periods. Only green products are Therefore, considering dynamic decisions in this area of research can
considered in the study. Differential game models have also been prove useful in terms of managerial insights. Existing research that
formulated. Peng (2013) determines the optimal government subsidy considers dynamic decisions focuses mainly on a green market or a
policy for a mixed market and shows that a very high price premium for mixed market where competitors exclusively produce a green or a
the green product can be a major hindrance to green product adoption. brown product (recall the differential games reviewed above). Hence, it
Within a green market, Zhang et al. (2018) examine a does not capture the green and brown product interaction for a firm that
manufacturer-retailer energy efficiency cost-sharing game. The authors produces or sells both. For instance, different dynamic decisions like
conclude that the manufacturer should mainly govern the energy effi product pricing, investments in greening, subsidy, sales effort, quality,
ciency level. Also restricted to a green market, Liu et al. (2020) and order quantity have been considered (Chen and Sheu, 2009; Peng,
3
2013; Zhang et al., 2017, 2018bib_Zhang_et_al_2017bib_Zhang_e Table 2

t_al_2018; Zhang et al., 2020). An exception is Mukherjee and Carvalho Model parameters and decisions. All parameters are non-negative.
(2020) that considers a mixed market. It is shown that the optimal Parameter Description Parameter Description
pricing for the monopolistic manufacturer is to progressively increase
αg ∈ R + market potential of green x ∈ [0, 1] share of costs carried by
the green price, while doing the opposite for the brown price. In our products the retailer
paper, for the scenarios with a leader, we achieve similar trends for the αb ∈ R + market potential of brown σ∈R + cost benefit per unit
equilibrium strategies of the manufacturer and the retailer, although products learning
with different price magnitudes. For the case without leadership, the βg ∈ R + price sensitivity of green ω ∈ [0, 1] decay of learning
products
both product wholesale prices are increasing over time. Thus, our price sensitivity of brown greening sensitivity
βb ∈ R + k1 ∈ R+
contribution is noticeably incremental, providing new and comple products towards investments
mentary results. γg ∈ R + cross price sensitivity of k2 ∈ R + greening sensitivity
Cost-sharing. Cost-sharing of greening investments is a topic of great green products towards learning
cross price sensitivity of ε ∈ [0, 1] decay of greening level
interest in the area of green supply chain research. In most of the cases γ b ∈ R+
brown products
the cost-sharing is exhibited between manufacturers and retailers, e.g. η ∈ R+ consumer sensitivity of δ ∈ R+ brown consumers’ green
Ghosh and Shah (2015); Liu et al. (2020), or manufacturers and sup greening level attraction
pliers, e.g. Liu and De Giovanni (2019). We follow the existing literature φ ∈ R+ learning effectiveness of μ ∈ R+ proportionality constant
(Bai et al., 2017; Ghosh and Shah, 2015; Li and Li, 2016; Ramani et al., demand for cost
Decision Description States Description
2019; Zhu and He, 2017) and assume that the cost-sharing proportion of
the greening cost offered by the retailer is a static offer at the beginning pg(t) retail (manufacturing) λ(t) learning level
(wg(t)) price of green product
of the game. However, in our study, we show that the static cost-sharing
pb(t) retail (manufacturing) S(t) greening level
contract may be inefficient and generate a sub-optimal profit. As our (wb(t)) price of brown product
game evolves, the retailer may need to renegotiate the cost’s proportion I(t) greening investments
to share with the manufacturer. This situation is more realistic as a
one-shot cost-sharing policy is restrictive in dynamic markets.
Cost benefit with learning from green demand. Learning from green
demand can have substantial cost reduction implications for a firm. 3. Model setup
However, such learning models have been scarcely studied in the
context of the green supply chain. Within a static model, Yenipazarli and We consider a manufacturer-retailer chain where the manufacturer
Vakharia (2015) assume cost savings due to demand learning. In a dy supplies a green product and its brown counterpart to a retailer. For this
namic setting, Zhang et al. (2018) consider the hyperbolic learning purpose, we add new dimensions to the model from Mukherjee and
adopted in previous literature. In a more recent work, Mukherjee and Carvalho (2020), allowing to broaden our analyzes and thus, reach
Carvalho (2020) model learning as a state variable. We adopt the novel managerial insights. Next, we summarize the model extensions.
approach of the latter as that is consistent with the research questions of
our study. ● A retailer is introduced to the monopoly manufacturer setting of
Green and brown consumer surplus. Green consumers pay a price Mukherjee and Carvalho (2020). This typical interaction enables us
premium for green products. In a mixed product market, where there is to analyze the effect of adding a vertical member on the firms’
attraction towards green products and product switchers, a firm’s decisions.
management might be interested in knowing the socially optimal in ● A greening cost-sharing policy offered by the retailer is added. In
vestment or pricing strategy. Our examination of the literature revealed some cases, such element is shown to affect both firms’ outcomes
some studies in this context (Ghosh et al., 2020; Yin et al., 2020; Sinayi positively.
and Rasti-Barzoki, 2018; Yang and Xiao, 2017; Shen et al., 2020). ● Different game dynamics corresponding to distinct market leader
However, our contribution is ancillary to the literature because we ship scenarios are considered.
demonstrate how consumer surplus varies for the green and brown
products with time and other model parameters in different market The retailer sells these products to the end clients, and it offers a
leadership scenarios. From the above investigation, we found that te share x of the total greening costs. In terms of market leadership, three
majority of the models investigating optimal decision making are static. possible situations can occur in a duopoly market: (i) both the manu
In a comprehensive literature review, Agi et al. (2020) observe that the facturer and the retailer have the same market power, (ii) the manu
“Future research should consider using non-cooperative games and devel facturer is the market leader or (iii) the retailer is the market leader.
oping dynamic game models”. To the best of our knowledge, in the area of Intending to minimize the paucity of the realistic yet less investigated
a mixed product market, ours is the first paper to articulate the six research method of differential games in this area of green supply chain,
critical themes mentioned at the beginning of this section. By doing so, we consider a dynamic setup. Throughout this paper, we use the sub
we provide novel insights to the well-studied area of green product scripts g and b to indicate the association of a variable with the green and
pricing, brown product pricing in the presence of product cannibaliza the brown product, respectively. The decision variables of the manu
tion, green cost-sharing, and green sensitive consumer market. To that facturer are.
end, we have highlighted only the literature that pertains to the coor
dination mechanism and competitive scenarios in the context of the ● wj(t): wholesale price of product j at time t, for j ∈{g, b};
green supply chain. ● I(t): the green quality investment at time t;
and those of the retailer are.
4
● pj(t): retail price of product j at time t, satisfying the relationship pj(t) footprint throughout its life-cycle. Such green products initiatives can be
= wj(t) + mj(t), where mj(t) represents the profit margin, for j ∈{g, b}. due to a firm’s internal motivation, regulatory pressure, or consumer
demand (Gouda et al., 2019). Consequently, firms need to invest in such
As in Mukherjee and Carvalho (2020), the state variables are S(t), the green quality. Moreover, learning in our model can lead to green process
greening level (or green quality), and λ(t), the learning level of green improvements and augment the green quality. Thus, the greening level’s
practices. The demand is realized at the retailer’s level. Finally, the evolution increases with the investment effort and learning, and it has
decision problems of the manufacturer and the retailer are respectively some decay. In Equation (1), the last term reflects the cost of greening.
given by: These utilities are positively impacted by learning λ(t) and by the cost
∫∞ [ (μ )] benefit per unit learning denoted by σ, resulting in the cost savings term
ΠM (t) = Max e− rt Dg wg + Db wb − (1 − x) I 2 − σλ(t) dt, σ λ(t). The parameter σ signifies how much cost is saved per learning
2
unit.1 Above, we motivated this linear decrease cost with learning. The
wg ,wb ,I 0
∫∞ (1)
[ (μ )] remaining term is justified by the widely used modeling of greening
ΠR (t) = Max e− rt Dg mg + Db mb − x I 2 − σλ(t) dt,
pg ,pb 0 2 costs as quadratic functions of the green investments (Ghosh and Shah,
2015; Dong et al., 2019). The parameter x denotes the proportion of
subject to costs being shared by the retailer. Even though x is not a decision var
( ) (2)
Dg (t) = αg + ηS(t) − βg pg (t) + γg pb (t) iable, it has an important significance. Namely, we investigate whether
cost-sharing is beneficial for both firms under different power structures.
Db (t) = (αb − δS(t)) − βb pb (t) + γb pg (t) (3) We also investigate if the optimal proportion of cost-sharing is invariant
over time. Although the vertical interaction and cost-sharing scheme of
λ̇(t) = φDg (t) − ωλ(t) and λ(0) = 0 (4) our model, the demands, learning, and greening level dynamics are
fundamentally the ones described for the manufacturer monopoly in
Ṡ(t) = k1 I(t) + k2 λ(t) − εS(t) and S(0) = 0, (5) Mukherjee and Carvalho (2020). In this section, we provided compli
mentary support for their adoption.
with parameters, decisions and states described in Table 2. The player
utilities are given in Equation (1) where the first two terms correspond
4. Analysis of equilibrium policies
to the firms’ profits with respect to the demands, Dg and Db, and the third
corresponds to their share on greening costs. The last term will be
We aim to solve the decision problems presented in the previous
explained further ahead in this section. Equations (2) and (3) express the
section. Namely, we seek the feedback strategies (equilibrium) of the
market demands for the green and the brown product respectively, and
manufacturer and the retailer. Thus, as per the standard procedure, we
we denote the total instantaneous demand by D(t) = Dg(t) + Db(t). Pa
need to solve the Hamilton-Jacobi-Bellman (HJB) equations:
rameters αg and αb are the market potentials of the green product and the
( ( 2 ))
brown product, respectively. They signify the market demand of the ∂VM ∂VM μI
rVM (S, λ) = Max Db wb + Dg wg + λ̇ + Ṡ − (1 − x) − σλ
green and the brown product when price and green quality are absent. wg ,wb ,I ∂λ ∂S 2
Similar to Mukherjee and Carvalho (2020), we assume the following ( ( 2 ))
∂VR ∂VR μI
relations among the parameters in the demands: η > δ, βj > γ j for j ∈{g, rVR (S, λ) = Max Db mb + Dg mg + λ̇ + Ṡ − x − σλ ,
pg ,pb ∂λ ∂S 2
b}. Two observations are worth noting. First, the market potentials of the
(6)
green and the brown product are (αg + ηS(t)) and (αb − δS(t)). Thus, the
consumers who switch from brown to green are δS(t), and ηS(t) is the and we guess that the value functions are respectively of the forms
total number of consumers at time t who are inclined to buy the green
product. Therefore, (η − δ)S(t) are the consumers who never buy the VM (S, λ) = B1 S2 + B2 λ2 + B3 λS + B4 S + B5 λ + B6 ,
(7)
brown product and are only attracted to the green one. Second, as the VR (S, λ) = G1 S2 + G2 λ2 + G3 λS + G4 S + G5 λ + G6 .
demand functions (2)–(3) reflect, green customers are neither restricted
to buying the green product nor the reverse. Equation (4) models the before proceeding further, remark that the determination of the HJB
learning dynamics which decreases the firms’ costs (Equation (1)). The solutions and thus, the prices, investment, greening level and learning
parameter φ in Equation (4) denotes the learning effectiveness of de variation with time, depend on the leadership scenario: Nash game (N)
mand. In other words, φ determines how much the learning evolves for and Stackelberg game with the manufacturer as leader (MS) and the
the firm per unit time given a specific demand. A high φ reflects a firm retailer as leader (RS).
which is a fast learner, it has efficient training and employees or it The proofs of the Propositions 1-3, which rely on Equations (6) and
implemented advanced technologies, otherwise φ is low. Naturally, this (7), and Lemmas 1-10 are given in Appendix A.
value of φ varies from industry to industry. The integration of learning in
our model is supported by articles in the green supply chain literature. 4.1. Feedback strategies of the firms
Within a static game framework, Yenipazarli and Vakharia (2015)
considered a mixed green-brown market and assumed cost reduction for In this section, we study the optimal prices of the products and the
green production due to learning from demand. Zhang et al. (2018) on greening investments for the three scenarios. When firms move simul
the other hand, model a hyperbolic cost learning function under the taneously, we have:
differential game framework. Zhang, Tang, and Zhang (2016) again
Proposition 1. Under the N game, the equilibrium pricing and the in
consider a linear cost function with learning effect. Similarly, our
vestment decisions of the manufacturer and the retailer are given by:
formulation assumes that the manufacturer can reduce the production
cost of green products by economies of scale. In other words, as demand
increases, learning from more production takes place with some decay.
Nevertheless, differently from the mentioned models, the learning is a
state variable. Equation (5) describes the greening level (quality).
Environmentally sustainable innovation by firms gives them a compet 1
For example, if λ(t) = 0.05 is measured by increment in productivity (5%
itive advantage (Shrivastava, 1995). Green quality of a product refers to
increment in this case) given a particular resource, and σ = 1, it would mean
environmentally sustainable production, like reducing carbon emissions
that the firm saves 0.05 × 1 = 0.05 (scaled to appropriate unit of dollar value)
while manufacturing it, or product design reducing the overall carbon due to the learning and the sensitivity σ.
5
1 ( ( ( ( )
wg (S, λ) = ( ) β (Δ1 − 2Δ2 )( − φ)γb β2g + βg (2Δ1 + Δ2 )( − φ)γ2b − γ b − αb + αg + 4(Δ1 − 2Δ2 )φγg + S(δ + η)
βb βg − γ b γ g F1 b
( )) ( )( )) ( (
+ 2γg αb + Δ2 φγg + δ( − S) + 3γb γb − γ g αg + ηS + γb γ b βg − 3αb + (Δ1 + Δ2 )φγb − 3Δ2 φγg
(8)
( ) ( )
+ 3δS) + γ2b αb − 2αg + Δ1 φγg − S(δ + 2η) + γb γg αb + (2Δ1 − Δ2 )φγg + δ( − S)
( )) ( ))
− 2γ2g αb + Δ2 φγg + δ( − S) + 3β2b βg αg + (Δ1 − 2Δ2 )φβg + ηS ,
1 ( ( ( ( ) ) ( )( ))
wb (S, λ) = ( ) β β β 3αb − (Δ1 + Δ2 )φ 2γb − γg − 3δS + 4γb + γ g αg + ηS
βb βg − γ b γ g F1 b g g
( ( ( ) ( )) (9)
+γb − βg γ b − αb + 2αg − (Δ1 + Δ2 )φγg + S(δ + 2η) + γg αb + αg + δ( − S) + ηS
( ( ) ) ( )( ))) )
+ β2g − 3αb + (Δ1 + Δ2 )φ γb − γg + 3δS − γg γb + γ g αg + ηS ,
The equilibrium strategies are very complex mathematical expressions.

Analytically, we examine the impact of the state variables on the retail
k1 (B3 λ + 2B1 S + B4 )
I(S, λ) = , prices. These directly affect the demand and hence the profit of the
μ(1 − x)
firms. Similar effects of the state variables are expected to be observed
for the wholesale prices (manufacturer prices). In the numerical section,
1( ( ( ) )) we give a detailed sensitivity analysis of both the prices and investment
pg (S,λ) = γ 2αb − 2αg +(Δ1 +Δ2 )φ βg +γg − 2S(δ+ η)
F1 b according to the relevant model parameters.
( ) ( ) The next proposition provides the feedback strategies in the manu
+βb 6αg − 3(Δ1 +Δ2 )φβg +6ηS +2γg 2αb +(Δ1 +Δ2 )φγg − 2δS ,
facturer Stackelberg game: the manufacturer moves first and decides the
(10) wholesale prices wg(t), wb(t) and the investment I(t).
Proposition 2. Under the MS game, the equilibrium pricing and the in
(βb η − δγg )S + βb αg + γg αb φ(Δ1 − Δ2 )

wg (S, λ) = + ,
F2 2
( )
βg (αb − δS) + γ b αg + ηS
wb (S, λ) = ,
F2
k1 (B3 λ + 2B1 S + B4 )
I(S, λ) =
μ(1 − x)
, (12)
( ) ( )( )
2βb φβg (Δ2 − 3Δ1 ) + αg + ηS + γb + γ g φγb (Δ1 − Δ2 ) + 2φγ g (Δ1 ) + αb − δS
pg (S, λ) = + wg ,
2F3
( ( ( )( ) ( )( ))
1 βg φ γg − γ b Δ1 − Δ2 ) + 2αb − 2δS + γ b + γg αg + ηS
pb (S, λ) = + wb ,
2 F3
( )( ) ( ( ) )
2 γ b +γ g αg + ηS − βg − 6αb +(Δ1 +Δ2 )φ γb − 2γg +6δS
pb (S,λ) =
F1
, where Gis and Bis are the coefficients of the value functions of the retailer
(11) and the manufacturer respectively and Δ1 = 2G2λ + SG3 + G5, Δ2 = 2B2λ +
( )2
where Gis and Bis are the coefficients of the value functions of the retailer B3S + B5, F2 = 2βbβg − 2γbγ g, F3 = 4βb βg − γ b + γg .
and the manufacturer respectively, Δ1 = 2G2λ + SG3 + G5, Δ2 = 2B2λ +
Proposition 2 provides the feedback strategies in the manufacturer
B3S + B5 and F1 = (− 3γ bβg + 9βbβg − (γb + γ g)(γb + 2γg)).
Stackelberg game. Subsequently, the retailer decides the retail prices as
The above proposition reveals the feedback pricing and green in a follower. In Equation (12), we present the retail prices as a sum of the
vestment decisions of the manufacturer and the retailer. It is evident that wholesale price and the margin. Clearly, the unit profit margin of a
the equilibrium strategies are linearly dependent on the state variables. green or a brown product depends on S(t) and λ(t). Finally, we present
6
the case in which the retailer is the Stackelberg leader.

Proposition 3. Under the RS game, the equilibrium pricing and the in
where Gis and Bis are the coefficients of the value functions of the retailer
and the manufacturer respectively and C = 2λ(G2 + B2) + S(G3 + B3) + G5
+ B5, X1 = 2λG2 + SG3 + G5, X2 = 2λB2 + SB3 + B5, F4 =
1 ( 2 ( (
wg (S, λ) = β β β γ (− 10αb + 11αg + (27X2 − 11X1 )φγg + δ(− S))
F4 b g g b
) )
+ γg (2αb + αg + (7X2 − 2X1 )φγg − 3δS) + (X1 + 2X2 )φγ2b − (9γ2b − 2γb γg + γ 2g )(αg + ηS)
( (
+βb γ b γ g (γ b + γg )(5γb − 3γg )(αg + ηS) + βg γ3g (δS − αb ) + γ3b (− αg − (X1 + 3X2 )φγg + δS)
(13)
))
+ γ2b γg (7 b
α − 16αg + 4(2X1 − 5X2 )φγg + 9δS) + γb γ2g (10 b
α − 7αg + (5X1 − 13X2 )φγg − 3δS)
(
+4β3b β2g (αg + (X1 − 3X2 )φβg + ηS) + γ b γ g (γ b + 3γg ) γ 2g (δS − αb ) + γ 2b (αg + X2 φγg + δ(− S))
))
+ γb γg (− αb + 2αg − (X1 − 2X2 )φγg + δ(− S)) ,
[
1 1
wb (S, λ) = − Sδβg + αg βg + Sηγg + αg γ g − ( )
β g βb − γ g γ b (βb βg − γb γg ) 16βb βg − (γ b + 3γg )2
{[ (
βb βg γg (βg (γb (− 4αb + (X1 + X2 )φγb − 4αg + 8δS) + γ g (− 4αb − (X1 + X2 )φγb + 4δS)) − 3γb (γb + 3γg )(αg + ηS))
)] (14)
+ βb βg ((7γb + 5γg )(αg + ηS) + βg (8αb + (X1 + X2 )φ(γg − γ b ) + 4αg − 12δS))
[ ( (
− γ 2g γ g βg (γ b (− 4αb + (X1 + X2 )φγb − 4αg + 8δS) + γ g (− 4αb − (X1 + X2 )φγb + 4δS))
) )]}]
− 3γb (γ b + 3γg )(αg + ηS) + βb βg ((7γb + 5γg )(αg + ηS) + βg (8αb + (X1 + X2 )φ(γg − γ b ) + 4αg − 12δS)) ,
(βb βg − γb γ g )2 (16βb βg − (γb + 3γg )2 ).A note on greening investments: It

is noteworthy that the mathematical expression of the green investment
is the same in all three games. However, this does not mean that the
k1 (B3 λ + 2B1 S + B4 ) investment is the same. In each game, the coefficients Gi and Bi, i ∈{1, 2,
I(S, λ) = , (15) 3, 4, 5, 6} have different solutions. Moreover, the cost sharing propor
μ(1 − x)
tion x may vary across different games. The state variables S(t) and λ(t)
1 ( (
pg (S, λ) = β β (3γ (φγg (C) + 2αb + αg − 3δS) + γ b (5φγg (C) + 2αb + αg − 3δS))
F4 b g g
) (
+ (γ2b − 10γb γ g − 3γ2g )(αg + ηS) + 4β2b βg (− φβg (C) + 3αg + 3ηS) − γ g (γ b + 3γg ) γ b (φγg (C) + αb + αg − 2δS) (16)
))
+ γ g (αb − δS)
1 ( (
pb (S, λ) = γ β (γ (φγb (C) − 4αb − 4αg + 8δS) + γ g (− φγb (C) − 4αb + 4δS))
F4 g g b (17)
) )
− 3γb (γ b + 3γg )(αg + ηS) + βb βg (βg (φ(γg − γ b )(C) + 8αb + 4αg − 12δS) + (7γb + 5γg )(αg + ηS))
also have different trajectories in each game. Therefore, the investment

assumes different values in different games. We illustrate this in Section
7
5. coefficients G2 and B2 are positive, and consequently the conditions of

our Lemma are satisfied. Thus, higher learning decreases prices of the
green product. Learning helps in reducing the greening costs. The direct
4.2. Qualitative analysis of equilibrium decisions effect of this is a price reduction with a higher learning.
Lemma 3. Under the symmetry assumption, in each of the N, MS and RS
In the following part of our analysis we present lemmas shedding game, the price of the green as well as the brown product increase with η and
light on the qualitative properties of the equilibrium pricing and in decrease with δ.
vestment policies. More precisely, we examine (i) how the retailer’s
decisions vary with the state variables and the consumers’ attraction Regarding η and δ, the manufacturer’s pricing strategies for the
towards green products (parameters η and δ), and (ii) how the manu brown and the green good are similar. With an increase in η (i.e. the
facturer’s investment varies with the state variables and the cost-sharing green consumer base) green demand increases. Moreover, the manu
proportion. Recall that the manufacturer’s pricing decisions are too facturer’s investment in the greening level also increases with η (shown
complex to be analytically treated, therefore we do it numerically in numerically in Section 5). Therefore, the price of the green product in
Section 5. While we provide a comprehensive analysis of the equilibrium creases with η. The brown product price increases because the producer
decisions, it is often more tractable to consider symmetry of the system wants to reduce product differentiation by bridging the gap between the
parameters (i.e., βg = βb = β and γg = γb = γ) without compromising the brown and the green price. When δ is high, the consumer leaves the
quality of the insights obtained. The symmetry of parameters implies brown product at a higher rate, thereby decreasing the brown demand.
that the brown and the green product have similar price sensitivity and However, the manufacturer tries to retain consumers by lowering the
cross price sensitivity. In simple words, a unit price increase of the green brown product price. Since the green product is costlier and more
(respectively, brown) product affects the green (respectively, brown) profitable, the retailer’s green price decreases it to keep sufficiently high
demand by β units. The green (respectively, brown) demand increases green demand and profit from high sales volumes.
by the amount γ if the brown (respectively, green) product price in Lemma 4. Under the symmetry assumption, the following properties hold:
creases by 1. This simplification allows us to draw useful insights by
reducing the number of model parameters. (a) In the Nash game, the retail price of the brown product is strictly
Lemma 1. Under the symmetry assumption βg = βb = β and γg = γb = γ, the increasing with the greening level S(t) if and only if η > 3β
2γ δ −
following properties hold: βφ(G3 +B3 )
,
4
(b) In the MS and the RS game, the retail price of the brown product is
(a) In the N game, at any instant t the retail price of the green product is
strictly increasing with the greening level S(t) if and only if η > βγ δ.
strictly increasing with the greening level S(t) if and only if η >
3γ φ(G3 +B3 )(3(β2 − γ2 )− βγ) )
; Comparing Lemmas 1 and 4, we can conclude that in the Nash game,
3β− γ δ + 6β− 2γ
the green and the brown retail prices increase with the greening level, if
(b) In the MS game, the retail price of the green product is strictly δ < φγ(G3 + B3) (this condition follows from comparing the thresholds of
increasing with the greening level S(t) if and only if η > βγ δ + η). However, in the MS and RS games, if the green price increases with
φG3 (β2 − γ2 )
, the greening level, the brown retail price also rises with the greening
3β
level. The argument in favor of such strategy behind brown price
(c) In the RS game, the retail price of the green product is strictly increment is as follows: in the MS and RS games, the retailer, in its best
increasing with the greening level S(t) if and only if η > βγ δ + interest, shares some proportion of the greening costs. Therefore, by
φ(β2 − γ2 )(G3 +B3 )
. increasing the brown product’s price, the retailer shifts the demand
3β
towards the green product resulting in higher profits by selling more
According to Lemma 1, irrespective of the game scenario, the price of expensive the green product.
the green product increases with the greening level S(t) if η is greater
than a threshold depending on δ. However, this threshold varies with the Lemma 5. (a) Under the symmetry assumption, in the Nash game, the
type of game. Thus, we can conclude that the realizations of η and δ retail price of the brown product is strictly increasing
together determine the green and the brown pricing policies with with if G2 + B2 > 0,
respect to S(t). Therefore, in a mixed product market, it is important for (b) In the MS game, the price of the brown product is strictly increasing
the firms to accurately determine the green-level sensitivity and the with the learning if and only if G2 > 0 and γg > γb,
brown consumers’ attraction towards a green product. (c) In the MS game, the price of the brown product is increasing in
learning with the learning if and only if G2 + B2 > 0 and γ g > γb.
Lemma 2. Under the symmetry assumption,
One may presume that learning only affects the greening costs and
(a) In the Nash game, the retail price of the green product is decreasing in therefore should not concern the brown product price. However, in a
the learning if and only if G2 + B2 > 0, setting where both firms have to decide the prices of the green and the
(b) In the MS game, the retail price of the green product is decreasing in brown product, the learning affects the brown one in an indirect way
the learning if and only if G2 > 0, and our feedback strategies show that indeed it is a function of both
(c) In the RS game, the retail price of the green product is decreasing in the greening level and learning.
learning if and only if G2 + B2 > 0. Lemma 6. In all three scenarios, the following properties hold:
2
We note that G2 and B2 are the sensitivities of S (t) to the value
functions of the retailer and the manufacturer, respectively. The value a) The manufacturer is motivated to increase its greening level investment if
functions have many solutions depending on the different parameter the retailer increases the share of the costs.
values. However, for admissible solutions which give positive price and b) The greening investment is increasing in the greening level if B1 > 0 and
investment as well as state variables reaching steady state, one can increasing in the learning if B3 > 0.
expect that greening level S(t) and hence S2(t) to have a positive impact Lemmas 2, 3 and 5 are inline with the monopolistic manufacturer
on the value functions. This is because S(t) increases the high priced model of Mukherjee and Carvalho (2020), while the green and the
green product demand and hence profit. Therefore, we can conclude brown price dependence on greening level (Lemmas 1 and 4) strongly
that for the admissible solutions of our model, almost surely the
8
Fig. 1. Price comparison and cost-sharing.
differs. Moreover, whereas in the monopolistic manufacturer case the manufacturers may need to refrain from possible measures of producing
green investment is always increasing with learning and greening level, a greener product. Indeed, according to recent research by BCG, out of
Lemma 6 part (b) shows that this is not always the case under the hundreds of survey respondents, only 13% of firms adhered to the
duopoly. decarbonization measures planned (Küpper et al., 2020). Here, we show
how a budget constraint changes our model as the green product is
4.2.1. Cost-sharing and the brown-green dilemma produced only under certain conditions. We assume that there is a fixed
In what follows, we investigate the necessary budget to handle the cost of greening given by Cf. This fixed cost can be thought of as an
optimal investment strategies and the potential for brown product average benchmark incremental cost of greening a product in a partic
cannibalization. ular industry. For example, Jolly (2020) reports that by 2022, on
Manufacturer’s dilemma under a budget constraint: Manufacturers are average, electric vehicles will cost USD $1900 more to manufacture than
constrained by a budget when it comes to green product development. their gasoline counterparts. In our model, the interpretation of fixed
Within green manufacturing, carbon emission reductions can result in greening cost can be Cf = 1900 in case of electric vehicles. Additionally,
substantial conversion costs. Due to the curbing of budget, the greening costs increase with the greening level and decrease with the
Fig. 2. Investment and cost-sharing.
9
learning. Consequently, the total budget allocated by a firm’s manage consumer surplus of the green and the brown product varies with the
ment for greening increases with the greening level and shrinks with greening level, price and the green product sensitivities. Following
learning. Thus, we define a green budget given by Mg(t) = Cf + ξsS(t) − Spence (1975) and Futagami et al. (2019), we define the green consumer
ξλ(t). Lemma 7 provides the conditions for green product sales. surplus (indexed by g) and the brown consumer surplus (indexed by b)
as:
Lemma 7. The production of the green product is guaranteed only if
( ) ∫ q=Dg (t)
Cf μ(1 − x) − k1 B4 − (μξ(1 − x) + k1 B3 )λ(t) CSg (t) = Pg (q(t))dq − pg ∗ (t)Dg ∗ (t),
S(t) ≤ . (18)
(20)
q=0
(2B1 k1 − ξs (1 − x)μ) ∫ q=D (t)b
CSb (t) = Pb (q(t))dq − pb ∗ (t)Db ∗ (t),
The Lemma above provides the manufacturer’s management team q=0
with a direct verification procedure of the established budget, based on
their willingness to invest in greening (ξs) and their disposal to decrease where Pg(q), Pb(q) are the inverse demand functions at time t, pg ∗ (t),
investments based on learning. and pb ∗ (t) are equilibrium green and brown retail prices and Dg ∗ (t),
Db ∗ (t) are the equilibrium green and brown demands, respectively, at
Product cannibalization: A manufacturer and a retailer may be lured
time t.
to phase out the brown product. Such actions benefit the firms and the
environment alike. The firms benefit from high prices of green products Lemma 9. At any time t, assuming positive demand of the green product,
as learning decreases the greening cost with time. The environment the green consumer surplus is always increasing in the price pg and the
benefits from the low impact of the green product on the environment. greening level S, and it is decreasing with the green sensitivity η.
Lemma 8 gives the condition for attaining an all green market by dCGg (t)
cannibalizing the brown product. The formula for dpg supporting the result above is counter-
intuitive. One would expect that consumer surplus decreases with
Lemma 8. The complete cannibalization of the brown product occurs if
price. However, in our case, the consumer demand is also affected by the
and only if dCG (t)
greening level and, from dSg , we find that the consumer surplus is
1
pg (t) = ((αb − δS(t)) + βb pb (t)) (19) increasing with the greening level. Therefore, an increasing consumer
γb surplus signifies that consumers are willing to pay a high premium for a
dCGg (t)
high greening level. From dη , the consumer surplus decreases with
We assume that the right hand side of Equation (19) is positive in
general because in any scale one can expect αb to be sufficiently large. the green sensitivity. This result contradicts the finding of Ghosh et al.
The only negative term is − γδ S(t). We would like to highlight that at (2020) who analyzed the consumer surplus in the presence of only a
b
green product and in a monopoly context. The authors argue that a
equilibrium, Equation (19), results on very complex parametric re
greener consumer base mitigates the impact of high costs of greening. In
lationships being satisfied. For each game, these conditions differ and
our study, price and greening investment (we show this numerically in
the solutions to the parametric relationships may not be feasible.
Fig. 10) both increase with η. An increasing price here has a positive
Therefore, brown product cannibalization may not always be an option
impact on consumer surplus, while increasing cost has a negative
which can be fulfilled by the firms.
impact. The resulting impact of the above factors on the consumer
surplus at equilibrium leads to its decrease.
4.3. Consumer surplus Lemma 10. (a) At any time t, assuming positive green demand, brown
consumer surplus increases in the greening level S(t).
The main challenge faced with the sale of the green product is the
price premium that the consumers may need to pay. While many of them (b) At any time t, assuming positive brown product demand, brown
are willing to buy green, they may not be able to afford it. In turn, consumer surplus is always increasing with the price pb if and only if
producers need not to be the most profitable when consumers benefit the βbβg > γbγ g.
most from the market. Therefore, in this section, we investigate how the
Fig. 3. Price sensitivity to φ
10
Fig. 4. Investment sensitivity to φ
Fig. 5. Price sensitivity to σ
Fig. 6. Investments sensitivity to σ
c) Brown consumer surplus decreases with δ. 5. Numerical experiments

In our model, a general assumption is that price sensitivities are
There are several important parameters in our differential game
higher than cross price sensitivities. This is consistent with empirical
which dictate the decisions as well as the profits of the manufacturer and
studies. Therefore, the brown consumer surplus increases with the
the retailer. Due to the complex mathematical expression of the de
brown product price. This is counter-intuitive. In presence of the green
cisions and the profits, we perform a numerical analysis to gain insights
product, and a demand which is influenced by greening level, the
about the impact of these model parameters. Among all, x, φ, σ, η and δ,
“quality” perception of the brown product can only be signaled by price.
are the parameters that we vary since they influence coordination, the
Thus, we believe, a higher price signals a better quality for the brown
rate of learning, the cost decrease with learning, and the green and
product. Consequently, the willingness to pay for the brown product
brown sensitivity to green level, respectively. In summary, we study the
increases. As the price increases, the gap between willingness to pay and
effect of these parameters on three elements: price and investment, firms’
the actual price at equilibrium also increases. This explains why brown
profits and consumer surplus. The assumed parameter values are given
consumer surplus increases with the price of the brown product. When δ
below:
increases, more product cannibalization happens for the brown product.
Fixed parameters
Recall that Lemma 3 states that the price of the brown product decreases
αg = αb = 10; k1 = k2 = 1; μ = 10; r = 0.05; ε = 0.1; ω = 0.1; β = βg =
with δ. Therefore, the perception of brown product quality and the
βb = 2; γ = γ g = γ b = 1;
willingness to pay for the same decreases. Thus, the consumer surplus of
Varying parameters
the brown product decreases with δ.
x ∈{0, 0.1, 0.2, 0.3, 0.4}; φ ∈{0.001, 0.003, 0.005}; δ ∈{0.01, 0.02,
0.03, 0.04}; σ ∈{0, 0.2, 0.4}; η ∈{0.03, 0.05, 0.07}.
11
Fig. 7. Price sensitivity to δ
Fig. 8. Investments sensitivity to δ
Note: All parameter values are given above. However, we do not brown product to reduce cannibalization and to compete. As the retailer
always display all the values of the parameters in our plots for sake of shares a higher proportion of greening costs, the greening level rises,
clarity and without loss in terms of conclusions. resulting in higher green product demand. Consequently, as x increases,
the retailer reduces the brown product prices to reduce the effect of
greening on brown product’s demand and avoid cannibalization. The
5.1. Pricing and greening investment
manufacturer’s prices for the green and the brown product increase with
x in the Nash game. However, the brown product’s manufacturer price
Pricing and greening efforts (investment) are our decision variables.
decreases with x in the MS and RS games (Fig. 1). In the Nash game, the
Given the complex expressions of the pricing and investment decisions,
greening investment is the highest and increase with x (Fig. 2). More
the following numerical analysis allow us to gain more insights and
over, the manufacturer and the retailer have equal power. Therefore, at
answer our research questions.
equilibrium, the manufacturer not only increases the price of the green
product with x, but also increases the price of the brown product with x
5.1.1. Impact of cost-sharing
to obtain maximum profits.
Observation 1. a) The retail price of the green product increases and that
Observation 2. a) The greening investment of the manufacturer increases
of the brown product decreases if the proportion of cost shared by the retailer
with the retailer’s cost-sharing proportion. b) The presence of a market leader
increases. b) The wholesale price wb(t) of the brown product increases with
is detrimental to the greening investment.
the cost-sharing proportion x in the Nash game but decreases with the same in
From Fig. 2, we notice that the manufacturer invests more as the
the MS and RS game. c) Given a share of cost x, the following relations hold
retailer shares more cost. The retailer’s involvement in cost-sharing
for the products’ prices in the three games:
motivates the manufacturer to invest more in the greening level. How
1. pMS RS
g > pg > pg
Nash
2. pMS RS
b > pb > pb
Nash
ever, the manufacturer’s greening investment is the highest in the Nash
3.wMS Nash
g > wg > pRS MS Nash
g 4. wb > wb > wRS
b game, followed by the MS game and then the RS game. This finding
From Fig. 1, we observe that when the retailer shares a higher pro comports with Sang (2019) who investigates the investments for a firm
portion of the greening costs, it adjusts the price of the green product to selling green products only.
make up for the higher costs it shares. Therefore, the retail price of the
green product rises with x. This is true in all the games. On the other 5.1.2. Impact of learning efficiency (φ)
hand, the brown product’s retail price decrease with x in all the sce The parameter φ signifies how sensitive the green demand is towards
narios (Nash, MS, RS). From Fig. 2, increasing the cost-sharing propor learning. In other words, given a certain green demand, a higher value of
tion x results in higher greening investments. This results in a higher φ means that the learning rate is higher. A firm can be a fast learner by
greening level. While the green product is differentiated from the brown the virtue of its resources (like efficient employees) or advanced
product by price and “green quality”, price is the only weapon for the
12
Fig. 9. Price sensitivity to η
Fig. 10. Investment sensitivity to η
technology. We investigate if a higher value of φ has a salient impact on costs of investment. This explains why the retail price relationships
the prices of the products. reverse later in the planning horizon.
Observation 3 a) At the beginning of the Nash game, RS game and MS
game, the retail price of the brown product satisfies the following relations: 5.1.3. Impact of σ
pg(φ = 0.001) > pg(φ = 0.003) > pg(φ = 0.005); pb(φ = 0.001) < pb(φ Next, we analyze the impact on price of the parameter σ , the cost
= 0.003) < pb(φ = 0.005) efficiency of the learning.
As time elapses and the retail prices become steady, the relationship Observation 4 The retail and the wholesale prices of both the green and
among prices changes to the following: the brown products decrease with σ. The variation in price of the brown
pg(φ = 0.001) < pg(φ = 0.003) < pg(φ = 0.005); pb(φ = 0.001) > pb(φ products is meagre.
= 0.003) > pb(φ = 0.005). A high cost efficiency of learning results in reduced costs of greening.
The above observation follows from Fig. 3. It is counter-intuitive that Therefore, the manufacturer and the retailer can offer a reduced price
with a high value of φ, the green product’s price increases at the steady- for the green product (Fig. 5). From Fig. 6, interestingly, we find that
state. One would expect that high efficiency can increase learning and greening investment increases with σ . Thus, we can expect a higher
decrease the costs of greening. However, from Fig. 4, we find that the greening level with a higher value of σ. On the one hand, apparently
investment in greening also rises with learning efficiency φ. This is firms invest more with a high value of σ, on the other hand, a higher
because a high learning efficiency increases the learning, which directly value of σ reduces the cost of investment. This is a very desirable situ
affects the greening level (Equation (5)). Consequently, the greening ation for both the firms. At equilibrium, to reduce cannibalization, the
level increases, the green demand rises, and the investment increases. brown product price drops.
Further, the slope of learning is steep at the beginning and it decreases as
time passes. With time, the cost-benefit of high learning outweighs the
13
Fig. 11. Profit comparison and cost-sharing. In the left (right) the profit of the retailer (manufacturer) is displayed.
Observation 6. a) The retail price as well as the wholesale price of both

the green and the brown products increase with η. b) The greening investment
increases with η.
A high value of η increases the green product’s demand as well as the
greening investments (Fig. 10). Consequently, the price of green prod
ucts increase with η (Fig. 9). The greening investments increase as a
large green sensitive consumer base inspires the manufacturer to invest
more in greening.
5.2. Profits of the firms
Fig. 12. Profit comparison and cost-sharing.

We analyze how the firms’ profits are affected by the retailer’s
shared cost and whether the profit of the firms varies largely in different
5.1.4. Impact of η and δ scenarios. We use the given set of parameters values defined in the
The parameters η, green level sensitivity and δ, the attraction of the beginning of this section and we vary the cost-sharing proportion x in
green product for traditional consumers, have a significant effect on the set {0, 0.1, 0.2, 0.3, 0.4, 0.5}. In the subsequent figures, the man
demand if greening level is high. We therefore, examine the effect of ufacturer’s and the retailer’s profits are denoted by Vm and Vr, respec
these parameters on price and greening investment. tively. We denote the profits in the different scenarios by:
Observation 5 a) The steady retail price as well as the manufacturer’s VNm : Manufacturer’s profit in the Nash Game; Vr : Retailer’s profit in
N
price of the green and the brown products decrease with δ. b) The greening the Nash Game;
investment decreases with δ.
m : Manufacturer’s profit in the MS Game; Vr : Retailer’s profit in
VMS MS
If δ is high, the brown consumers switch to the green product at a
the MS; Game.
higher rate for a given greening level S(t). A decreasing demand for the
m : Manufacturer’s profit in the RS Game; Vr : Retailer’s profit in
VRS RS
brown product with a higher δ value causes the price of the brown
product to fall (Fig. 7). A counter-intuitive result is that the green the RS Game.
product price also falls with rising δ. However, Fig. 8 reveals that
greening investment decreases with δ. Thus, the firms can offer a lower 5.2.1. Impact of cost-sharing
green price as they invest less. Since a high δ compensates for a lower Observation 7 The following relationships hold:
greening level S(t), the firms lose motivation to invest more for product
greening. The above behavior of the manufacturer is same as in a (i) V MS N RS
m > Vm > Vm ;
monopolist scenario (Mukherjee and Carvalho, 2020). (ii) V RS N MS
r > Vr > Vr ;
14
Fig. 13. Profit sensitivity to φ
Fig. 14. Profit sensitivity to σ
(iii) V MS MS RS RS N N
m > Vr ; Vm > Vm ; Vm > Vr .
game. However, in the MS game the cost-sharing proportion of the
retailer varies with time. The retailer starts with no cost-sharing and
From Fig. 11, we see that the manufacturer and the retailer are most eventually shares around 20% of the costs. We obtained the profits for
profitable when they are market leaders and the manufacturer is better values of x ∈{0.1, 0.2, 0.3, 0.4, 0.5}. There is a range of values around x
off in the Nash game. Indeed, it is not surprising that in the MS game, the = 0.2 for which the cost sharing is profitable for both the firms. Since we
manufacturer makes higher profits, and in the RS game, the retailer could solve the HJB equation only for discrete values of x, determination
makes higher profits. This is consistent with numerous results in the of this exact range is not possible.
literature (Sang, 2019). Fig. 12 shows how the retailer’s profit changes with the cost-sharing
Observation 8. a) In the RS game, the retailer’s profit increases with the proportion in the MS game. It is evident from the figure that the retailer
cost-sharing proportion x. b) In the MS game, the retailer starts with no cost- gradually changes its cost-sharing proportion from 0% to around 20%
sharing but gradually increases the share to around 0.2 proportion of the over time. The above phenomenon can be an implication of the manu
greening costs as this is optimal for it. c) In the Nash game such cost-sharing facturer’s power in this MS game as it is the market leader.
mechanism may fail.
The decision of cost-sharing or not is based on whether both the 5.2.2. Impact of φ
manufacturer and the retailer have any incentive to deviate from the As evident from Fig. 13, the profits for both the manufacturer and the
scheme. In our model, the incentive of deviation is higher profit. In the retailer are increasing with the efficiency of learning. We recall from
Nash game and the RS game, irrespective of the cost sharing proportion, Section 5.1.2 that the prices of both the green and the brown products
the decision of the two rational firms remain consistent over time – (i) no decrease as φ increases. It may appear paradoxical that the profit of the
cost-sharing in the Nash game and (ii) highest cost-sharing in the RS firms increase though the prices of the products decrease. We note that a
15
Fig. 15. Profit sensitivity to δ
Fig. 16. Profit sensitivity to η
higher value of φ results in a higher learning λ(t), thereby decreasing the 5.2.3. Impact of σ
cost by a larger amount 2μI2 (t) − σλ(t). Thus the negative effect of a price The cost efficiency of learning σ has a significant positive impact on
decrease on profit is overshadowed by the positive effect of the cost profits (Fig. 14). A higher value of σ would imply higher cost savings.
savings. Therefore, the firms’ profits increase with an increasing value of σ.
Moreover, learning λ(t) is increasing with time. Therefore, given a
16
Fig. 17. Veblen effect - price vs demand.
Fig. 18. Consumer surplus - sensitivity to x.
Fig. 19. Consumer surplus - sensitivity to σ
Fig. 20. Consumer surplus - sensitivity to δ
Fig. 21. Consumer surplus - sensitivity to η
17
Fig. 22. State variables.
positive value of σ, the term σλ(t) is also increasing with time. Thus, the – In the Nash game the investment in greening is the highest and the
cost savings as well as the firms’ profits both increase with time. retail prices are the lowest. Therefore, as discussed in Section 5.3, the
consumers get maximum utility by buying green. This leads to the
5.2.4. Impact of η and δ highest consumer surplus in the Nash game.
A higher value of δ signifies a higher rate of cannibalization of the – Impact of x - Fig. 18: As the retailer increases the share x of greening
brown product. From Fig. 15, we note that a higher rate of cannibali costs, the green consumer surplus decreases and the brown consumer
zation reduces the profit of the retailer as well as the one of the manu surplus increases. This is because the retailer charges a higher price
facturer. This is precisely the reason why firms maintain a mix of green for the green product as its cost increases with the proportion x.
and brown products and may not prefer to completely take the brown – Impact of σ - Fig. 19: The green consumer surplus increases with σ
product off the shelves. The profit decline with cannibalization can be which is the cost efficiency of learning. The investments on greening
explained by the reduction in prices with higher value of δ, as evident increase with σ , consequently increasing the greening level. The
from Fig. 7. price decreases with σ . Thus, the green consumers are getting a
A higher green consumer sensitivity results in higher green demand. “greener” product for a lower price. Therefore, the consumer surplus
At equilibrium, the firms charge a higher price for the green product in increases with σ. The brown consumer surplus however decreases
the long run. Therefore, the profits of the firms increase with η as green with σ . This is because, with a higher value of σ, the low priced
consumer base increases (Fig. 16). However, we note that when η = δ, i.e “greener” product is prevailing. The willingness to pay for the brown
the green demand increases only due to cannibalization of the brown product, and consequently, the brown consumer surplus decreases.
product, then the retailer’s profit can actually decrease with time. Thus, – Impact of δ (Fig. 20) and η (Fig. 21): From the mentioned figures, we
mere cannibalization of a brown product may not be beneficial for a note that the green consumer surplus decreases and the brown con
retailer and therefore the retailer would like new consumers (not sumer surplus increases with both δ and η. The reason behind this has
product switchers) to be attracted by the green quality of the green been explained in the analytical Section 4.3.
counterpart.
5.5. State variables

5.3. Price and demand - veblen effect?
We depict the state variables in Fig. 22. Clearly, the learning is non-
In our model, we observe a peculiar behavior of demand in relation linear and the learning rate decreases over time. This is consistent with
to the green product’s price. Violating the normal demand law, as price some of the empirical studies (Levitt et al., 2013).
increases, the demand also increases for the green product in all the Highest greening level is achieved in the RS game, followed by the
games. Such an effect is often referred to as the Veblen effect (Veblen, MS game. The greening level is the smallest in the Nash game. From
2005). Fig. 17 illustrates the variation of demand with prices at the time Section 5.4, we find that the consumer surplus is still the highest in the
points t = 0, 10, 20, …, 100. The green quality of the product instigates Nash game. Moreover, customers pay the minimum retail price of the
conspicuous green buying. As a result, the green demand increases with green product in the Nash game and the highest in the RS game. This
price. Similar effects are supported by Berger (2019) who finds that captures an interesting side of consumer behavior – customers are
green signaling can increase consumer’s willingness to pay for the green willing to pay a price premium up to a certain level. Thereafter, irre
products and create a Veblen effect. Fig. 17 also shows that the green spective of the greening level, the price of the product dominates con
demand is higher in the Nash game. In Section 5.1 we showed that the sumer surplus. On the contrary, the highest learning is reached in the
retail prices are higher in the MS and RS games whereas greening in Nash game while RS and MS learning remains identical at a lower level.
vestment is higher for the N game. This results in higher demand in the Considering that cost-sharing fails, the green demand in the Nash game
Nash game. is higher than in the MS or RS games. Recalling, λ̇(t) = φDg (t) − ωλ(t),
the higher demand takes the learning to a higher level. Finally, note that
here, learning refers to experience which is driven by the production
5.4. Consumer surplus volume (Garvin, 1993). An organization gathers such experience during
production from failures, continuous process improvements, innovation
Previously, we analyzed how the cost-sharing policy affects decisions and so on. Again, the measurement of learning depends on the industry.
and profits. Next, we determine how the consumer surpluses evolve and In our scenario, one interpretation of λ(t) = 0.03 can be that 3% of costs
differ in the three scenarios, accordingly with the cost-sharing propor are saved because of the current state of learning. Alternatively it can be
tion. We also aim to answer the question: Which scenario is the socially the dollar value (appropriately scaled – example in millions) of cost
optimal one? saving. It can also be the increment of productivity given a specific cost
Observation 9. a) The Nash game is the socially most beneficial scenario. of greening. Thus, the possibilities of explaining the values of learning
The RS game is the worst for the consumers. b) The green consumer surplus are many and vary from context to context, namely, the units used for
increases with time and the brown consumer surplus decreases with time. the parameters. The values of the state variable S(t) can be interpreted
18
similarly. For example, in the case of electric vehicles, greening can be (Zhang et al., 2018), we articulated six key themes in the literature in
measured by how much more the battery life of an electric vehicle has one theoretical model and yet we were able to develop analytical and
increased. In this case, S(t) = 0.5 would signify that the battery life has numerical insights which are beneficial for the managers.
increased by 0.5 years. ● Our differential game provided a landscape of the situation in the
long run as we can observe how the manufacturer-retailer interac
6. Conclusion and future work tion evolves. For instance, if the game was static, we could not
conclude that the optimal cost-sharing policy changes over time or
In this article, we considered a dynamic supply chain with one that the green price starts lower than the brown one but then, over
manufacturer and one retailer deciding the prices of a green and a brown time, both start increasing. While there is literature applying dif
product, as well as the greening investment. In addition, the retailer may ferential games for addressing green supply chain decisions, e.g. Liu
offer to share the costs of greening. In summary, the most fundamental et al. (2020), the brown counterpart has not been included. Hence, to
findings of our study can be described by the following conclusions. the best of our knowledge, our work is the first enabling to evaluate
As paradoxical as it may seem, at the beginning of the planning the trade-off of these two products under cost-sharing. This dual
horizon, manufacturers and retailers should keep a lower green product consideration changes largely the dynamics of the conclusions from
price while they have a substitutable brown product. Down the line, the the mentioned literature.
pricing strategy should change to adding a price premium for the green ● Our most important finding was that green demand increases and
product and selling it at a higher price than the brown one. The Veblen brown demand decreases with time, even though the green price
effect is prominent in all scenarios. Consumers, lured by the green increases and the brown price decreases. These findings show that a
quality, increase the green product demand as its price increases. Our firm can become more sustainable even by charging higher product
results also underscored that market leadership can dictate the cost- prices when the optimal strategies are based on demand learning and
sharing proportion of a retailer. Retailers should avoid sharing a high consumers are attracted by the green quality.
proportion of greening cost in the presence of a powerful manufacturer
leader. The retail management’s approach should be a wait-and-play There are several avenues for the extension of our work. In a dynamic
game, wherein the manufacturer increases its investments over time, setting, one can explore other contracts apart from simple cost-sharing.
and the cost-sharing proportion of the retailer can also be increased with These can be considered as a decision variable to add more flexibility to
time, eyeing a higher profit. The management of a market leader retailer our model. Alternatively, a dynamic cooperative game with profit-
should agree to share a high proportion of greening costs for all players’ sharing using established methods like Shapley value would provide
betterment. A manufacturer should negotiate with a retailer to share a insightful results, allowing to understand the best coordination
substantial proportion of costs as this can lead to higher greening in approach within the supply chain. Adding the government’s interven
vestments and profits. In a budget-constrained scenario, a tion, e.g. as in Peng (2013), is also a topic of great interest. Such element
manufacturing firm’s management should closely scrutinize and plan a is particularly relevant to counter situations where the manufacturer’s
feasible trade-off between how much greening level can fetch additional learning rate is not sufficiently large, potentially leading to a very high
profits and how much costs can be saved due to learning. The flaw green price to decrease green demand and, thus, green costs.
lessness of this scrutiny dictates the values of ξs and ξ in our model. An
under or overestimation of these parameters can lead to missed oppor Acknowledgments
tunities as the management may curb the greening budget or overspend
on greening. The existing literature, focusing mainly on static games, The authors wish to thank the support of the Institut de valorisation
investigates many important research questions in a mixed green-brown des données and Fonds de Recherche du Québec through the
product market. Our incremental contributions are the following: FRQ–IVADO Research Chair in Data Science for Combinatorial Game
Theory, and the Natural Sciences and Engineering Research Council of
● While the existing articles focus on different decisions like price, Canada through the discovery grant 2019-04557. The authors also thank
green quality and order quantities, e.g. Chen and Sheu (2009); the anonymous reviewers and the editor for their valuable comments
Yenipazarli (2017); Peng (2013); Zhang et al. (2020), or relevant that helped improve the paper.
variables like green innovation (Zhang et al., 2017) and learning
Appendix A
The proofs of the propositions depend on the HJB equations. For a detailed solution procedure and sufficiency of using first order partial de
rivatives for complete characterization of the solutions one may refer to chapter 3 of Dockner et al. (2000). To avoid repetition, we present the HJB
equations, the demand functions and the value functions at the beginning and refer to these from each Proof. In the proofs, we drop the time notation
(t) (for example S(t) is referred to as S) for brevity.
( ( 2 ))
∂V ∂V μI
rVM (S, λ) = Max Db wb + Dg wg + (φDg − ωλ) + (λk2 + k1 I − εS) − (1 − x) − σλ
wg ,wb ,I ∂λ ∂S 2
( ( 2 )) (A.1)
∂V ∂V μI
rVR (S, λ) = Max Db mb + Dg mg + (φDg − ωλ) + (λk2 + k1 I − εS) − x − σλ
pg ,pb ∂λ ∂S 2
We conjecture that the value functions of the retailer and the manufacturer are respectively of the forms
VM (S, λ) = B1 S2 + B2 λ2 + B3 λS + B4 S + B5 λ + B6 ,
(A.2)
VR (S, λ) = G1 S2 + G2 λ2 + G3 λS + G4 S + G5 λ + G6 .
The demand functions are:
19
Dg (t) = αg − βg pg (t) + γg pb (t) + ηS(t)

(A.3)
Db (t) = αb − βb pb (t) + γb pg (t) − δS(t).
We also note that the partial derivatives are given by:
∂VM
= 2B1 + λB3 + B4
∂S
∂VM
= 2B2 + SB3 + B5
∂λ
(A.4)
∂VR
= 2G1 + λG3 + G4
∂S
∂VR
= 2G2 + SG3 + G5 .
∂λ
Proof of Proposition 1:
Proof. We solve the firsts order conditions of the right hand side of Equations (A.1) with respect to the decision variables pg, pb, wg, wb, I. To simplify
our subsequent calculations, first we denote Δ1 = 2G2λ + SG3 + G5, Δ2 = 2B2λ + B3S + B5. We also use the relationships pg = wg + mg and pb = wb + mb
whenever necessary for the calculations.
∂VM
= pb γg + γ b wb + αg − Δ2 φβg − βg pg − βg wg + ηS = 0, (A.5)
∂wg
∂VM
= αb + γ b pg − βb pb − βb wb + Δ2 φγg + γg wg + δ(− S) = 0, (A.6)
∂wb
∂VM ∂VM
= k1 − μ(1 − x)I = 0, (A.7)
∂I ∂S
∂VR
= pb γ g + γb (pb − wb ) + αg − Δ1 φβg − 2βg pg + βg wg + ηS = 0, (A.8)
∂wg
∂VR
= αb − 2βb pb + γ b pb + βb wb + Δ1 φγg + γ g (pg − wg ) + δ(− S) = 0. (A.9)
∂wb
We simultaneously solve the above 5 equations and simplify to get the following solutions:
1
wg (S, λ) =
(βb βg − γ b γ g )(− 3γb βg + 9βb βg − (γ b + γg )(γb + 2γg ))
( (( ((
βb Δ1 − 2Δ2 )(− φ)γb β2g + βg 2Δ1 + Δ2 )(− φ)γ2b − γ b (− αb + αg + 4(Δ1 − 2Δ2 )φγg + S(δ + η))
) ) ( ( (A.10)
+ 2γg (αb + Δ2 φγg + δ(− S)) + 3γb (γb − γ g )(αg + ηS) + γ b γ b βg − 3αb + (Δ1 + Δ2 )φγb − 3Δ2 φγg
+ 3δS) + γ2b (αb − 2αg + Δ1 φγg − S(δ + 2η)) + γ b γ g (αb + (2Δ1 − Δ2 )φγg + δ(− S))
) )
− 2γ2g (αb + Δ2 φγg + δ(− S)) + 3β2b βg (αg + (Δ1 − 2Δ2 )φβg + ηS)
1
wb (S, λ) =
(βb βg − γ b γ g )(− 3γb βg + 9βb βg − (γ b + γg )(γb + 2γg ))
(
βb βg (βg (3αb − (Δ1 + Δ2 )φ(2γb − γ g ) − 3δS) + (4γb + γ g )(αg + ηS))
(
+γb − βg (γb (− αb + 2αg − (Δ1 + Δ2 )φγg + S(δ + 2η)) + γg (αb + αg + δ(− S) + ηS)) (A.11)
)))
+ β2g (− 3αb + (Δ1 + Δ2 )φ(γb − γ g ) + 3δS) − γ g (γ b + γg )(αg + ηS) ,
k1 (B3 λ + 2B1 S + B4 )
I(S, λ) = ,
μ(1 − x)
1 ( )
pg (S, λ) = γ (2αb − 2αg + (Δ1 + Δ2 )φ(βg + γg ) − 2S(δ + η)) (A.12)
− 3γb βg + 9βb βg − (γb + γ g )(γb + 2γg ) b
+βb (6αg − 3(Δ1 + Δ2 )φβg + 6ηS) + 2γg (2αb + (Δ1 + Δ2 )φγg − 2δS),
2(γb + γ g )(αg + ηS) − βg (− 6αb + (Δ1 + Δ2 )φ(γb − 2γg ) + 6δS) (A.13)
pb (S, λ) = ,
− 3γb βg + 9βb βg − (γ b + γg )(γb + 2γg )
where Ais and Bis are the coefficients of the value functions of the manufacturer and the retailer respectively and Δ1 = 2G2λ + SG3 + G5, Δ2 = 2B2λ
+ B3S + B5.Proof of Proposition 2:
20
Proof. To obtain the solution of the MS game, we start by finding the reaction function of the retailer. The reaction functions are obtained by using
the first order conditions of the HJB of the retailer with respect to pg and pb. Using Equations (A.1), the first order conditions are:
∂Vr
= − φβg (2G2 λ + G3 S + G5 ) + pb γg + γb (pb − wb ) + αg − βg pg − βg (pg − wg ) + ηS = 0 (A.14)
∂pg
∂Vr
= φγg (2G2 λ + G3 S + G5 ) + αb + γ b pg − βb pb − βb (pb − wb ) + γg (pg − wg ) + δ(− S) = 0 (A.15)
∂pb
Solving for Pg, pb from the above equations we get:
1 ( (
pg (wg , wb ) = − 2
− (γb + γ g ) φγg (2G2 λ + G3 S + G5 ) + αb
4βb βg − (γ b + γg ) (A.16)
) )
+ βb wb − γ g wg + δ(− S) − 2βb (− φβg (2G2 λ + G3 S + G5 ) − γ b wb + αg + βg wg + ηS) ,
1 (
pb (wg , wb ) = 2G2 λφγ b βg + G5 φγb βg + G3 Sφγ b βg − 2G2 λφβg γ g − G5 φβg γg − G3 Sφβg γ g − 2αb βg
γ 2b − 4βb βg + 2γb γ g + γ2g
(A.17)
)
− γb αg − γ b βg wg − 2βb wb βg + γb wb γ g − ηSγ b + γ2b wb − αg γg + 2δSβg − ηSγ g + βg γg wg
Thereafter, we put these values of pg(wg, wb), pb(wg, wb) in the HJB equation of the manufacturer and solve for the decisions wg, wb using the first
order conditions on the HJB equation of the manufacturer. The associated first order conditions are:
∂VM 1 ( ( (
= βg γg 2γb (φ(− 2G2 λ − G3 S − G5 + 2B2 λ + B3 S + B5 ) + 2wg )
∂wg 4βb βg − (γ b + γg )2
( (A.18)
+ αb + δ(− S)) + γ b (δS − αb ) ) + 2βb βg βg (φ(2G2 λ + G3 S + G5 − 2B2 λ − B3 S − B5 ) − 2wg )
) )
+ wb (γ b + γg ) + αg + ηS − γb (γ b + γg )(2wb γ g + αg + ηS) = 0,
∂VM 1 ( (
= βb βg (− (γb + γg )(φ(2G2 λ + G3 S + G5 − 2B2 λ − B3 S − B5 ) − 2wg ) + 2αb − 2δS)
∂wb 4βb βg − (γ b + γg )2
) ( (A.19)
+ γb (4wb γ g + αg + ηS) + γg (− (αg + ηS)) + γ g (γ b + γg ) γ b (φ(2G2 λ + G3 S + G5 − 2B2 λ − B3 S − B5 ) − 2wg )
)
− αb + δS) − 4β2b wb βg
Denoting Δ1 = 2G2λ + SG3 + G5, Δ2 = 2B2λ + B3S + B5, solving the above equations and simplifying we get the wholesale prices of the manu
facturer which are given by:
(βb η − δγg )S + βb αg + γg αb φ(Δ1 − Δ2 )
wg = + ,
2βb βg − 2γb γ g 2
(A.20)
βg (αb − δS) + γ b (αg + ηS)
wb = .
2βb βg − 2γb γg
Lastly, we put the expression of the wholesale prices in the reaction functions of the retailer to get the retail prices. Algebraic manipulations and
simplifications yield the following retail prices;
2βb (φβg (Δ2 − 3Δ1 ) + αg + ηS) + (γb + γ g )(φγb (Δ1 − Δ2 ) + 2φγg (Δ1 ) + αb − δS)
pg = + wg ,
8βb βg − 2(γb + γ g )2
( ) (A.21)
1 βg (φ(γg − γb )(Δ1 − Δ2 ) + 2αb − 2δS) + (γ b + γg )(αg + ηS)
pb = + wb ,
2 4βb βg − (γb + γ g )2
Proof of Proposition 3:
Proof. Since the retailer is the leader, we need to find the reaction functions of the follower (manufacturer) first. We use the conditions pg(t) = wg(t)
+ mg(t) and pb(t) = wb(t) + mb(t). We take the first order conditions of the right hand side of rVM(S, λ) in equation (A.1).with respect to wg, wb and I. The
resulting equations are:
∂VM ∂VM
= αg − 2βg wg − βg mg + γg pb + ηS + γb wb − φβg
∂wg ∂λ
∂VM
= αg − βg wg − βg pg + γg pb + ηS + γ b wb − φβg = 0 (using mb = pg − wg )
∂λ
(A.22)
∂VM ∂VM
= αb − βb wb − βb wb − βb pb + γ g wg + γb pb − δS + φγg =0
∂wb ∂λ
∂VM ∂VM
= k1 − μ(1 − x)I = 0,
∂I ∂S
Solving Equations (A.22), we get:
21
k1 (B3 λ + 2B1 S + B4 )
I = , (A.23)
μ(1 − x)
− βb pb βg + pb γ 2g + αg βg + αg γg − δSβg + ηSγ g
wb (pb ) = − , (A.24)
γ b γ g − βb βg
γb (− βb pb + φγg (2B2 λ + B3 S + B5 ) + αg + γg pg + δ(− S)) + βb (pb γ g − φβg (2B2 λ + B3 S + B5 ) + αg − βg pg + ηS)

wg (pg , pb ) = − . (A.25)
γ b γ g − βb βg
Essentially, wb(pb) and wg(pg, pb) are the reaction functions of the manufacturer. We substitute these values of wg and wb in the value function of the
retailer given in (A.2). Simplifying, and taking the first order conditions for the profit maximization problem of the retailer to get the following
equations where C = 2λ(G2 + B2) + S(G3 + B3) + G5 + B5.
∂VR
= − βg (φ(C) + 4pg ) + pb (γb + 3γg ) + 3αg + 3ηS = 0 (A.26)
pg
∂VR 1 (
= β (β (φγg (C) + 2αb + pg (γb + 3γg ) + αg − 3δS) + γb (4pb γ g + αg + ηS) + γg (− (αg + ηS)))
pb βb β g − γ b γ g b g
(A.27)
)
+ γ g (γ g (− γ b (φ(C) + 3pg ) − αb + δS) − γ b (αb + γb pg + αg − 2δS)) − 4β2b pb βg = 0
Solving the above equations for the decisions pg, pb we get:

1 ( (
pg = βb βg (3γg (φγg (C) + 2αb + αg − 3δS) + γb (5φγg (C) + 2αb + αg − 3δS))
(βb βg − γ b γ g )(16βb βg − (γ b + 3γg )2 )
) ( (A.28)
+ (γ2b − 10γ b γg − 3γ2g )(αg + ηS) + 4β2b βg (− φβg (C) + 3αg + 3ηS) − γ g (γ b + 3γg ) γ b (φγg (C) + αb + αg − 2δS)
))
+ γg (αb − δS)
1 ( (
pb = γ g βg (γ b (φγb (C) − 4αb − 4αg + 8δS) + γ g (− φγb (C) − 4αb + 4δS))
(βb βg − γ b γ g )(16βb βg − (γ b + 3γg )2 ) (A.29)
) )
− 3γb (γ b + 3γg )(αg + ηS) + βb βg (βg (φ(γg − γ b )(C) + 8αb + 4αg − 12δS) + (7γb + 5γg )(αg + ηS))
Now replacing pg, pb in the reaction functions of the manufacturer we get:

1 ( ( (
wg = β2b βg βg γb (− 10αb + 11αg + (27X2 − 11X1 )φγg + δ(− S))
(βb βg − γ b γg )2 (16βb βg − (γb + 3γg )2 )
) )
+ γg (2αb + αg + (7X2 − 2X1 )φγg − 3δS) + (X1 + 2X2 )φγ2b − (9γ2b − 2γb γg + γ 2g )(αg + ηS)
( (
+βb γ b γ g (γ b + γg )(5γb − 3γg )(αg + ηS) + βg γ3g (δS − αb ) + γ3b (− αg − (X1 + 3X2 )φγg + δS)
(A.30)
))
+ γ2b γg (7αb − 16αg + 4(2X1 − 5X2 )φγg + 9δS) + γb γ2g (10αb − 7αg + (5X1 − 13X2 )φγg − 3δS)
(
+4β3b β2g (αg + (X1 − 3X2 )φβg + ηS) + γ b γ g (γ b + 3γg ) γ2g (δS − αb ) + γ 2b (αg + X2 φγg + δ(− S))
))
+ γb γg (− αb + 2αg − (X1 − 2X2 )φγg + δ(− S))
[
1 1
wb = − Sδβg + αg βg + Sηγg + αg γ g − ( )
βg βb − γ g γ b (βb βg − γb γ g ) 16βb βg − (γb + 3γg )2
{[ (
βb βg γg (βg (γ b (− 4αb + (X1 + X2 )φγb − 4αg + 8δS) + γ g (− 4αb − (X1 + X2 )φγb + 4δS)) − 3γb (γb + 3γg )(αg + ηS))
)] (A.31)
+ βb βg ((7γb + 5γg )(αg + ηS) + βg (8αb + (X1 + X2 )φ(γg − γb ) + 4αg − 12δS))
[ ( (
− γ 2g γ g βg (γ b (− 4αb + (X1 + X2 )φγb − 4αg + 8δS) + γg (− 4αb − (X1 + X2 )φγb + 4δS))
) )]}]
− 3γb (γ b + 3γg )(αg + ηS) + βb βg ((7γb + 5γg )(αg + ηS) + βg (8αb + (X1 + X2 )φ(γg − γ b ) + 4αg − 12δS)) ,
where X1 = 2λG2 + SG3 + G5 and X2 = 2λB2 + SB3 + B5.Proof of Lemma 1:
Proof. First we assume the symmetry: βg = βb = β and γ g = γb = γ. Putting these values in the expression of pg in each game, Nash, MS and RS, and
taking the first order condition with respect to S, we note that the green prices are increasing in S iff:
∂pg φ(G3 + B3 )(3β2 − βγ − 3γ2 ) − 6βη + 2γ(3δ + η)
Nash game: = − > 0, (A.32)
∂S 3(β − γ)(3β + 2γ)
∂pg 3(βη − γδ) G3 φ

MS game: = − >0 (A.33)
∂S 4(β2 − γ 2 ) 4
22
∂pg φ(G3 + B3 )(β − γ)(β + γ) − 3βη + 3γδ

RS game: = − > 0, (A.34)
∂S 4(β − γ)(β + γ)
Using the condition that β > γ, all the denominators are positive. Therefore the RHS of equations A.1, A.2 and A.3 are positive iff the numerators are
positive.
The positivity of the numerator of A.1 gives:
− φ(G3 + B3)(3β2 − βγ − 3γ2) + 6βη − 2γ(3δ + η) > 0.
Algebraic manipulations of the above inequalities together with the assumption βi > γ i for i ∈{g, b} shows that in the Nash game, the green price pg
strictly increases with the greening level S if and only if.
φ(G3 +B3 )(3(β2 − γ2 )− βγ) ) 2 2
η > 3β−3γ γ δ + 6β− 2γ . A similar treatment of the Inequalities (A.33) and (A.34) gives the conditions η > βγ δ + φ(β3β− γ ) and η > βγ δ+
φ(β2 − γ2 )(G3 +B3 )
3β respectively.Proof of Lemma 2:
Proof. The first order conditions of the green product prices with respect to learning λ, in the three games are obtained from the expressions of pg in
Propositions 1, 2 and 3. Since our Lemma pertains to when the prices are increasing The conditions are given by:
∂pg 2φ(G2 + B2 )(3β2 − βγ − 3γ2 )
Nash game: = − , (A.35)
∂λ 9β2 − 3βγ − 6γ2
∂pg 1
MS game: = − (G2 φ) (A.36)
∂λ 2
∂pg 1
RS game: = − φ(G2 + B2 ), (A.37)
∂λ 2
For equation (A.35), clearly the denominator is positive because β > γ. Therefore, for the price to decrease with λ, the numerator must be negative,
i.e., 2φ(G2 + B2)(3β2 − βγ − 3γ2) < 0. Again since φ > 0, the relation holds if and only if (G2 + B2) > 0 and 3β2 − βγ − 3γ2 > 0. The inequality 3β2 − βγ −
√̅̅̅̅
3γ2 > 0 is equivalent to β2 − 2β 6γ + 36
γ2 γ2
> 36 + γ2 . The above relation reduces to β > 376− 1 γ ≈ .847γ which is always true as β > γ. Therefore the condition
for green price to decrease with lambda in the Nash game is G2 + B2 > 0. It is straightforward that from Equations (A.36) and (A.37), pg decreases with
λ if and only if G2 > 0 and (G2 + B2) > 0 respectively.Proof of Lemma 3:
Proof. For the proof of this Lemma we recall that S, β, γ > 0 and β > γ. The lemma follows from the first order condition of the pricing decision pg with
respect to η and δ.
∂pg S(6β − 2γ)
Nash game: = , (A.38)
∂η 9β2 − 3βγ − 6γ2
∂pg 2γS
= , (A.39)
∂δ − 3β2 + βγ + 2γ2
∂pg 3βS
MS game: = , (A.40)
∂η 4β2 − 4γ2
∂pg 3γS
= , (A.41)
∂δ 4(γ2 − β2 )
∂pg 3βS
RS game: = , (A.42)
∂η 4β2 − 4γ2
∂pg 3γS
= (A.43)
∂δ 4(γ2 − β2 )
In all the derivatives with respect to η we can verify that the numerator and the denominator both are positive. Therefore, the derivatives are
positive and hence the prices increase strictly with η. Again, for all the derivatives with respect to δ, the denominators are negative. therefore, green
price decreases with δ in all the games.For the brown product, using the first order condition on pb, we get:
∂pb 4γS
∂η 9β2 − 3βγ − 6γ2
∂pb 2βS
= − , (A.45)
∂δ (β − γ)(3β + 2γ)
∂pb 3γS
MS game: = , (A.46)
∂η 4β2 − 4γ2
∂pb 3βS
= − , (A.47)
∂δ 4β2 − 4γ2
∂pb 3γS
RS game: = , (A.48)
∂η 4β2 − 4γ2
23
∂pb 3βS
= − (A.49)
∂δ 4β2 − 4γ2
Similar proceeding as in the case of green products we conclude that the brown product price increase with η and decreases with δ.Proof of Lemma
4:
Proof. We consider the first order conditions of pb with respect to S in the thee games.
∂pb βγφ(G3 + B3 ) − 6βδ + 4γη
∂S 3(β − γ)(3β + 2γ)
∂pb 3(βδ − γ η)
MS game: = − (A.51)
∂S 4(β2 − γ 2 )
∂pb 3(βδ − γ η)
RS game: = − , (A.52)
∂S 4(β2 − γ 2 )
Assuming β > γ, all the denominators are positive. Therefore, the usual algebraic manipulation after imposing the positivity of the numerators
yields:
η > 3β
2γ δ −
βφ(G3 +B3 )
4 for the Nash game;
η> β
γδ for the MS and the RS games.Proof of Lemma 5:
Proof. We take the derivatives of the brown product prices from Propositions 1, 2 and 3, with respect to the learning λ. We highlight that we use
symmetry of parameters only in the case of Nash game to simplify our findings. However, for the RS and MS games, the derivatives of pb with respect to
λ have the term γg − γb. Therefore, simplifying γg = γb will cause the derivatives to vanish. Therefore, to get a rigorous result we avoid the symmetry
assumption only in this case for the MS and RS games.
∂pb 2βγφ(G2 + B2 )
∂λ 9β2 − 3βγ − 6γ2
∂pb G2 φβg (γg − γ b )

MS game: = (A.54)
∂λ 4βb βg − (γb + γ g )2
∂pb 2φ(G2 + B2 )βg (γg − γ b )

RS game: = , (A.55)
∂λ 16βb βg − (γb + 3γg )2
From the above equations, first we note that all the denominators are positive. Therefore, all the first order conditions are strictly positive if the
numerators are also positive. This implies that (G2 + B2) > 0 in the Nash game, γg > γ b and G2 > 0 in the MS game and γ g > γb and G2 + B2 > 0 in the RS
game.Proof of Lemma 6:
∂pg
Proof. Examining the first order condition of investment I(t) with respect to x, the retailer’s share of greening cost, we get: ∂x = k1 (B3μλ+2B 1 S+B4 )
(x− 1)2
> 0.
k1 (B3 λ+2B1 S+B4 ) k1 B3
Therefore, the manufacturers investment increases with x. Clearly, I(t) = μ(1− x) implies, ∂∂SI = μk(1−
1 2B1 ∂I
x) and ∂λ = μ(1− x) k1, μ are positive. Therefore,
the investments are increasing with greening level if B1 > 0 and increasing in learning if B3 > 0.Proof of Lemma 7:
k1 (B3 λ+2B1 S+B4 )

Proof. We know that the green investment strategy is feasible if 0 ≤ I(t) ≤ Mg(t) = Cf + ξsS(t) − ξλ(t). Also, for each game, I(t) = μ(1− x) .
k1 (B3 λ+2B1 S+B4 )
Therefore, for the the budget constraint to be satisfied, we must have μ(1− x) ≤ Mg (t). Rearranging the terms, we get the Inequality (18).Proof of
Lemma 8:
Proof. The above Equation (19) follows directly from the condition Db(t) = αb − δS(t) − βbpb(t) + γbpg(t) = 0. Algebraic manipulation yields the given
result.Proof of Lemma 9:
Proof. The result follows from the first order condition of CSg(t) in Equation (20). The derivative with respect to price pg gives:
( )
dCGg (t) ηβb αg + pb γg − pg βg + ηS
= > 0. (A.56)
dpg βb βg − γ b γ g
We note that,
( )( ( ) )
dCGg (t) αg + pb γg − pg βg + ηS βb αg + pb γg + pg βg + ηS − 2pg γb γg
=
dS 2βb βg − 2γb γ g (A.57)
( )
− pg α g + pb γ g − pg β g + η S
dCG (t)
Algebraic manipulation of equation dSg > 0 yields, Dg > 0. Thus, for a positive demand of green products, the consumer surplus of green
consumers increases with the greening level. The first order condition with respect to η gives,
24
( )
dCGg (t) βb βg − αg − pb γ g + pg βg + η(− S)
=
dη βb βg − γ b γ g
(A.58)
− β b β g Dg
= < 0.
βb βg − γ g γ b
From Equation (A.58), the consumer surplus of green consumers decreases with η.Proof of Lemma 10:
Proof. The proof of this Lemma is similar to that of Lemma 9. With a higher greening level, the green demand increases.
References Liu, G., Yang, H., Dai, R., 2020. Which contract is more effective in improving product
greenness under different power structures: revenue sharing or cost sharing?
Comput. Ind. Eng. 106701.
Agi, M.A., Faramarzi-Oghani, S., Hazır, Ö., 2020. Game theory-based models in green
Mukherjee, A., Carvalho, M., 2020. Pricing and quality investments in a mixed brown-
supply chain management: a review of the literature. Int. J. Prod. Res. 1–20.
green product market. In: Computational Logistics. Springer, pp. 715–732.
Ambrose, J., 2020. The Guardian. UK Plans to Bring Forward Ban on Fossil Fuel Vehicles
Munoz, F., 2019. Ev Prices Have Been Growing during the Last 8 Years. https://www.
to 2030. https://www.theguardian.com/environment/2020/sep/21/uk-plans-to-
jato.com/ev-prices-have-been-growing-during-the-last-8-years/.
bring-forward-ban-on-fossil-fuel-vehicles-to-2030. accessed: 2021-05-04.
Nestlé, 2020. Nestlé Creates Market for Food-Grade Recycled Plastics, Launches Fund to
Axsen, J., Bailey, J., Castro, M.A., 2015. Preference and lifestyle heterogeneity among
Boost Packaging Innovation. https://www.nestle.com/media/pressreleases/allpre
potential plug-in electric vehicle buyers. Energy Econ. 50, 190–201. https://www.sci
ssreleases/nestle-market-food-grade-recycled-plastics-launch-fund-packaging-inno
encedirect.com/science/article/pii/S0140988315001553.
vation. accessed: 2021-05-04.
Bai, Q., Chen, M., Xu, L., 2017. Revenue and promotional cost-sharing contract versus
Nielsen, 2018. Was 2018 the Year of the Influential Sustainable Consumer? https://www
two-part tariff contract in coordinating sustainable supply chain systems with
.nielsen.com/us/en/insights/article/2018/was-2018-the-year-of-the-influential-su
deteriorating items. Int. J. Prod. Econ. 187, 85–101.
stainable-consumer/.
Basiri, Z., Heydari, J., 2017. A mathematical model for green supply chain coordination
Peng, H., 2013. Optimal subsidy policy for accelerating the diffusion of green products.
with substitutable products. J. Clean. Prod. 145, 232–249.
J. Ind. Eng. Manag. 6 (2), 626–641.
Benveniste, A., 2019. Average Americans Can’t Afford to Buy Green. https://www.
Ramani, V., Swami, S., Ghosh, D., 2019. Price premium effect, supply contracts and
bloomberg.com/news/articles/2019-03-07/it-s-not-cheap-being-a-green-consumer.
strategic decision making under environmental considerations. Benchmark Int. J.
Berger, J., 2019. Signaling can increase consumers’ willingness to pay for green
Sang, S., 2019. The cost sharing contract of greening level and pricing policies in a green
products. theoretical model and experimental evidence. J. Consum. Behav. 18 (3),
supply chain. International Journal of Applied Mathematics 49 (3).
233–246.
Shen, B., Cao, Y., Xu, X., 2020. Product line design and quality differentiation for green
Chen, Y.J., Sheu, J.-B., 2009. Environmental-regulation pricing strategies for green
and non-green products in a supply chain. Int. J. Prod. Res. 58 (1), 148–164.
supply chain management. Transport. Res. E Logist. Transport. Rev. 45 (5), 667–677.
Shrivastava, P., 1995. Environmental technologies and competitive advantage. Strat.
Demandt, B., 2021. Renault Zoe Europe Sales Figures. https://carsalesbase.com/europe
Manag. J. 16 (S1), 183–200.
-renault-zoe/.
Sinayi, M., Rasti-Barzoki, M., 2018. A game theoretic approach for pricing, greening, and
Dockner, E.J., Jorgensen, S., Van Long, N., Sorger, G., 2000. Differential Games in
social welfare policies in a supply chain with government intervention. J. Clean.
Economics and Management Science. Cambridge University Press.
Prod. 196, 1443–1458.
Dong, C., Liu, Q., Shen, B., 2019. To be or not to be green? strategic investment for green
Spence, A.M., 1975. Monopoly, quality, and regulation. Bell J. Econ. 417–429.
product development in a supply chain. Transport. Res. E Logist. Transport. Rev.
Veblen, T., 2005. The Theory of the Leisure Class: an Economic Study of Institutions.
131, 193–227.
Aakar Books.
Futagami, K., Matsumura, T., Takao, K., 2019. Mixed duopoly: differential game
Walley, N., Whitehead, B., 1994. It’s not easy being green. Harv. Bus. Rev. 72 (3), 46–52.
approach. J. Publ. Econ. Theor. 21 (4), 771–793.
Yang, D., Xiao, T., 2017. Pricing and green level decisions of a green supply chain with
Garvin, D.A., 1993. Building a learning organization. Building a learning organization.
governmental interventions under fuzzy uncertainties. J. Clean. Prod. 149,
Harv. Bus. Rev. 78–91.
1174–1187.
Ghosh, D., Shah, J., 2015. Supply chain analysis under green sensitive consumer demand
Yenipazarli, A., 2017. To collaborate or not to collaborate: prompting upstream eco-
and cost sharing contract. Int. J. Prod. Econ. 164, 319–329.
efficient innovation in a supply chain. Eur. J. Oper. Res. 260 (2), 571–587.
Ghosh, D., Shah, J., Swami, S., 2020. Product greening and pricing strategies of firms
Yenipazarli, A., Vakharia, A., 2015. Pricing, market coverage and capacity: can green
under green sensitive consumer demand and environmental regulations. Ann. Oper.
and brown products co-exist? Eur. J. Oper. Res. 242 (1), 304–315.
Res. 290 (1), 491–520.
Yenipazarli, A., Vakharia, A.J., 2017. Green, greener or brown: choosing the right color
Gouda, S.K., Awasthy, P., Krishnan, T., Sreedevi, R., 2019. What does “green quality”
of the product. Ann. Oper. Res. 250 (2), 537–567.
really mean? The TQM Journal 31 (1), 52–69.
Yin, X., Chen, X., Xu, X., Zhang, L., 2020. Tax or subsidy? optimal carbon emission
Hackbarth, A., Madlener, R., 2013. Consumer preferences for alternative fuel vehicles: a
policy: a supply chain perspective. Sustainability 12 (4), 1548.
discrete choice analysis. Transport. Res. Transport Environ. 25, 5–17. https://www.
Zhang, L., Wang, J., You, J., 2015. Consumer environmental awareness and channel
sciencedirect.com/science/article/pii/S136192091300103X.
coordination with two substitutable products. Eur. J. Oper. Res. 241 (1), 63–73.
Hong, Z., Guo, X., 2019. Green product supply chain contracts considering
Zhang, Q., Tang, W., Zhang, J., 2016. Green supply chain performance with cost learning
environmental responsibilities. Omega 83, 155–166.
and operational inefficiency effects. J. Clean. Prod. 112, 3267–3284.
Hong, Z., Wang, H., Yu, Y., 2018. Green product pricing with non-green product
Zhang, Q., Tang, W., Zhang, J., 2018. Who should determine energy efficiency level in a
reference. Transport. Res. E Logist. Transport. Rev. 115, 1–15.
green cost-sharing supply chain with learning effect? Comput. Ind. Eng. 115,
Jolly, J., 2020. Electric Cars ’as Cheap to Manufacture’ as Regular Models by 2024. https:
226–239.
//www.theguardian.com/environment/2020/oct/21/electric-cars-as-cheap-to-m
Zhang, Q., Zhang, J., Tang, W., 2017. Coordinating a supply chain with green innovation
anufacture-as-regular-models-by-2024.
in a dynamic setting. 4OR 15 (2), 133–162.
Küpper, D., Kuhlmann, K., Pieper, C., Burchardt, J., Schlageter, J., 2020. The Green
Zhang, Q., Zhao, Q., Zhao, X., 2019. Manufacturer’s product choice in the presence of
Factory of the Future bcg.com/publications/2020/green-factory-of-future.
environment-conscious consumers: brown product or green product. Int. J. Prod.
Lampert, A., 2020. REUTERS. Quebec to Ban Sale of New Gasoline-Powered Cars from
Res. 57 (23), 7423–7438.
2035. https://www.reuters.com/article/us-autos-canada-emissions/quebec-to-ba
Zhang, Q., Zhao, Q., Zhao, X., Tang, L., 2020. On the introduction of green product to a
n-sale-of-new-gasoline-powered-cars-from-2035-idUKKBN27W289. accessed: 2021-
market with environmentally conscious consumers. Comput. Ind. Eng. 139, 106190.
05-04.
Zhou, Y., 2018. The role of green customers under competition: a mixed blessing?
Levitt, S.D., List, J.A., Syverson, C., 2013. Toward an understanding of learning by doing:
J. Clean. Prod. 170, 857–866.
evidence from an automobile assembly plant. J. Polit. Econ. 121 (4), 643–681.
Zhu, W., He, Y., 2017. Green product design in supply chains under competition. Eur. J.
Li, X., Li, Y., 2016. Chain-to-chain competition on product sustainability. J. Clean. Prod.
Oper. Res. 258 (1), 165–180.
112, 2058–2065.
Ziegler, A., 2012. Individual characteristics and stated preferences for alternative energy
Liu, B., De Giovanni, P., 2019. Green process innovation through industry 4.0
sources and propulsion technologies in vehicles: a discrete choice analysis for
technologies and supply chain coordination. Ann. Oper. Res. 1–36.
Germany. Transport. Res. Pol. Pract. 46 (8), 1372–1385. https://www.sciencedirect.
com/science/article/pii/S0965856412000912.
25

International Journal of Production Economics: Arka Mukherjee, Margarida Carvalho

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

International Journal of Production Economics: Arka Mukherjee, Margarida Carvalho

Uploaded by

Copyright:

Available Formats

Int. J.

Production Economics 241 (2021) 108270

Contents lists available at ScienceDirect

International Journal of Production Economics

Dynamic decision making in a mixed market under cooperation:

1. Introduction announced investments on sustainable packing (Nestlé, 2020). Such

Chen and Sheu (2009) price, recycle ability M (many) ✓

2013; Zhang et al., 2017, 2018bib_Zhang_et_al_2017bib_Zhang_e­ Table 2

and those of the retailer are.

The equilibrium strategies are very complex mathematical expressions.

(βb η − δγg )S + βb αg + γg αb φ(Δ1 − Δ2 )

the case in which the retailer is the Stackelberg leader.

(βb βg − γb γ g )2 (16βb βg − (γb + 3γg )2 ).A note on greening investments: It

also have different trajectories in each game. Therefore, the investment

5. coefficients G2 and B2 are positive, and consequently the conditions of

Fig. 1. Price comparison and cost-sharing.

Fig. 2. Investment and cost-sharing.

Fig. 3. Price sensitivity to φ

Fig. 4. Investment sensitivity to φ

Fig. 5. Price sensitivity to σ

Fig. 6. Investments sensitivity to σ

c) Brown consumer surplus decreases with δ. 5. Numerical experiments

Fig. 7. Price sensitivity to δ

Fig. 8. Investments sensitivity to δ

Fig. 9. Price sensitivity to η

Fig. 10. Investment sensitivity to η

Observation 6. a) The retail price as well as the wholesale price of both

5.2. Profits of the firms

Fig. 12. Profit comparison and cost-sharing.

Fig. 13. Profit sensitivity to φ

Fig. 14. Profit sensitivity to σ

Fig. 15. Profit sensitivity to δ

Fig. 16. Profit sensitivity to η

Fig. 17. Veblen effect - price vs demand.

Fig. 18. Consumer surplus - sensitivity to x.

Fig. 19. Consumer surplus - sensitivity to σ

Fig. 20. Consumer surplus - sensitivity to δ

Fig. 21. Consumer surplus - sensitivity to η

Fig. 22. State variables.

5.5. State variables

The demand functions are:

Dg (t) = αg − βg pg (t) + γg pb (t) + ηS(t)

Solving Equations (A.22), we get:

γb (− βb pb + φγg (2B2 λ + B3 S + B5 ) + αg + γg pg + δ(− S)) + βb (pb γ g − φβg (2B2 λ + B3 S + B5 ) + αg − βg pg + ηS)

Solving the above equations for the decisions pg, pb we get:

Now replacing pg, pb in the reaction functions of the manufacturer we get:

where X1 = 2λG2 + SG3 + G5 and X2 = 2λB2 + SB3 + B5.Proof of Lemma 1:

∂pg 3(βη − γδ) G3 φ

∂pg φ(G3 + B3 )(β − γ)(β + γ) − 3βη + 3γδ

∂pb G2 φβg (γg − γ b )

∂pb 2φ(G2 + B2 )βg (γg − γ b )

k1 (B3 λ+2B1 S+B4 )

You might also like

2013; Zhang et al., 2017, 2018bib_Zhang_et_al_2017bib_Zhang_e Table 2