Consumer environmental awareness and channel coordination with two substitutable products

• We examine the impact of consumer environmental awareness (CEA) on order quantities and channel coordination.
• The closed-form expressions of optimal order quantities, wholesale prices and return credits are derived.
• A return policy can effectively coordinate a decentralized supply chain.
• Order quantity of the traditional product may not increase with CEA.
• Firms will benefit from product customization and consumer segmentation based on the distribution of CEA in a market.

This paper focuses on the impact of consumer environmental awareness (CEA) on order quantities and channel coordination within a one-manufacturer and one-retailer supply chain. The manufacturer produces two types of products: the environmental and the traditional products. These two products differ in their price and environmental quality. Based on the multi-product newsvendor model, this study compares three decision scenarios: the centralized model (M1), the decentralized model (M2), and the decentralized model with the coordination of a return contract (M3). The closed-form expressions of optimal order quantities, wholesale prices and return credits are derived for each scenario. Extending these models, we incorporate a production capacity constraint of the manufacturer. Finally, sensitivity analyses on model parameters are performed and numerical examples are provided.Our study suggests (1) the retailer’s profit monotonically increases while the manufacturer’s profit is convex with respect to CEA; (2) a return contract can help both parties to achieve the profit they could expect in the centralized model; (3) order quantity of the environmental product increases with CEA; (4) the production capacity constraint of the manufacturer does not impact order quantities of the two products if it is sufficiently large (when it is larger than two critical points); otherwise, production capacity constraint negatively changes the channel profit and order quantities; (5) our simulation study and sensitivity analyses indicate that the difference of environmental quality between the traditional and the environmental products determines whether order quantity of the traditional product increases or remains constant with respect to CEA. The firms will benefit from product customization and consumer segmentation based on the distribution of CEA in the market.