Integrated or decentralized: An analysis of channel structure for green products

•We study the interaction of channel structure with green product development.•Two manufacturers compete with each other directly or indirectly through independent retailers.•The green manufacturer always adopts the integrated channel strategy to pursue channel efficiency.•The channel choice of the conventional manufacturer depends on its potential market share.•The manufacturers encounter a prisoner's dilemma in equilibrium.

This paper focuses on the interaction of channel structure with green product development in a competitive setting. A game-theoretic model is constructed in which one manufacturer sells a green product, whereas another offers a conventional product in a same consumer market. The two manufacturers initially select either the integrated or decentralized channel strategy simultaneously. The green manufacturer subsequently determines the green level of its product. Finally, the two manufacturers compete with each other directly or indirectly through exclusive independent retailers. Our analysis indicates that in equilibrium the conventional manufacturer adopts the decentralized channel strategy to avoid direct competition with the green manufacturer by inserting an independent retailer when the conventional product has a small potential market share and the product substitutability is high. Otherwise, the conventional manufacturer selects the integrated channel strategy to seek channel efficiency. However, the green manufacturer always adopts the integrated channel strategy to pursue channel efficiency because of the opportunity to design an appropriate green level and adjust the market demand for the green product. This additional decision provides the green manufacturer with an alternative tool for competing with its rival. Further analysis reveals that the two manufacturers encounter a prisoner's dilemma given a relatively high product substitutability. The best result (i.e., the situation in which both manufacturers adopt the decentralized channel strategy) cannot be achieved in equilibrium. We also evaluate the effect of channel structure strategy on total environmental quality.