Green supply chain contracts with eco labels issued by the sales platform profitability and environmental implications

International Journal of Production Research
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Green supply chain contracts with eco-labels

issued by the sales platform: profitability and
environmental implications
Xiaolong Guo, Lihong Cheng & Jie Liu
To cite this article: Xiaolong Guo, Lihong Cheng & Jie Liu (2020) Green supply chain
contracts with eco-labels issued by the sales platform: profitability and environmental
implications, International Journal of Production Research, 58:5, 1485-1504, DOI:
10.1080/00207543.2019.1658911
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International Journal of Production Research, 2020
Vol. 58, No. 5, 1485–1504, https://doi.org/10.1080/00207543.2019.1658911
Green supply chain contracts with eco-labels issued by the sales platform: profitability and
environmental implications
Xiaolong Guo , Lihong Cheng and Jie Liu ∗
School of Management, University of Science and Technology of China, Hefei, People’s Republic of China
(Received 6 April 2019; accepted 11 August 2019)
Considering environmentally conscious consumers, a manufacturer, and a sales platform which provides eco-labels for qual-
ified manufacturers, this paper develops a supply chain model to study how eco-labels affect green supply chain operations,
from the profitability and environmental perspectives. The results show that the sales platform prefers the agency contract,
but the manufacturer prefers the wholesale price contract. Considering the performance of the supply chain, the agency con-
tract brings a higher profit while the wholesale price contract results in a bigger environmental improvement. An unexpected
but interesting result is that when the agency contract is used and consumer green awareness increases, the sale price declines
rather than increasing as it does under the wholesale price contract. This decline happens because the required marketing
effort of the sales platform will be lower, which incentivises the platform to reduce the commission rate. Consequently, the
manufacturer faces a lower commission rate and a higher margin when consumers display greater green awareness. More-
over, as the core and more powerful player of the supply chain, the sales platform can propose a platform-led revenue sharing
contract to fully coordinate the supply chain, which improves the performance of the supply chain both in profitability and
environmental perspectives.
Keywords: green supply chain; sustainable supply chain; sustainable operations; sales platform eco-label; agency contract;
wholesale price contract
1. Introduction
Due to the improvement of environmental consciousness, many consumers are changing their lifestyle to reduce their
impact on the environment, and research has shown that they could gain additional value from the environmental attributes
of green products (Wu and Pagell 2011). According to a Carbon Trust survey, 70% of the interviewed consumers are willing
to follow energy-saving advice on product packaging to reduce their carbon footprints (Morrison 2011). As a consequence,
many companies are starting to focus on sustainable development to improve their reputation and competitiveness. For
example, Method, a household products company in the U.S., reduces oil and energy use by 33% and reduces plastic usage
by 36% with its condensed laundry detergent, compared to regular detergents (Larson 2011, Section 6.3).
Different from conventional quality attributes, the greenness of a product is difficult for consumers to observe directly
(Baksi and Bose 2007). Therefore, manufacturers need to not only produce green products but also show their environmental
efforts to consumers through tools that help buyers make environment-friendly choices. Some research shows that using an
eco-label is an effective strategy to publicise the environmental impact information of products to consumers (Murali, Lim,
and Petruzzi 2019). Eco-labels are labels put onto products that meet certain environmental standards, indicated by a graphic
affixed to the packaging of qualified products. For enterprises, such labels can help to gain consumer trust and successfully
carry out green marketing1 . According to the Carbon Trust survey performed by Morrison (2011), 47% of the interviewed
consumers are willing to pay more for a labelled product than a non-labelled one with the same quality. As a result, firms
generally affix eco-labels to their products, labels which are either produced by themselves (referred to as self-labels)
or obtained from nongovernmental organisations (NGOs). Self-labels are extensively adopted by retailers thanks to their
accessibility. For example, Whole Foods Market and Walmart self-label their green products as ‘Responsibly Grown’ and
‘Natural’, respectively. However, consumers do not necessarily fully trust in the greenness of self-labelled products; the level
of trust depends on the firms’ reputation. This situation may result in undervaluation of the product (Horne 2009; Murali,
Lim, and Petruzzi 2019). In comparison, eco-labels endorsed by NGOs are much more trusted by consumers (Fischer
and Lyon 2014). For instance, PG Tips adopts the Rainforest Alliance label, and Co-operative (Twinings and Taylors of
*Corresponding author. Email: [email protected]
© 2019 Informa UK Limited, trading as Taylor & Francis Group

1486 X. Guo et al.
Harrogate) displays the Fair Trade label (Heyes and Martin 2016). However, the drawback of eco-labels from NGOs is that
the standards are relatively low, such labels cannot display the specific green information of each product, and the NGOs
are out of touch with sales.
Apart from self-labels and eco-labels of NGOs, a third type of eco-label provided by sales platforms has emerged with the
development of e-commerce; such labels are referred to as SPE-labels. Many sales platforms label products to indicate that
these products have been tested to be green. For example, Red Star Macalline (hereafter referred to as Macalline), the leading
home furnishing and service sales platform in China, has launched a ‘Green Leading’ project since 2013 in cooperation with
the China Quality Certification Centre. Macalline labels products from qualified manufacturers and provides marketing
efforts (e.g. ‘the Green and Environmental Week’2 ) to promote these brands in the Macalline marketplace. More and more
manufacturers are adopting green environmental protection as a core competency element and apply for this SPE-label.
Furthermore, according to a survey about the year-over-year growth in the sales of manufacturers who had SPE-labels in
2018 (e.g. La-Z-Boy, KingKoil, OLO, and Laishi), the sales volumes of the SPE-labelled manufacturers are growing at a
much higher rate than the total retail sales volume for consumer goods (Macalline and Centre 2018).
SPE-labels have advantages over self-labels and the eco-labels of NGOs. Firstly, such SPE-labels, endorsed by sales
platforms, have higher credibility for consumers than self-labels and can provide a higher level of greenness certification
with more detailed information rather than just a basic standard required by an NGO. Therefore, the SPE-labels will influ-
ence the consumers’ purchasing behaviour and the manufacturer’s green product design. Secondly, considering that the sales
platform is a part of the green supply chain, providing SPE-labels can not only promote the greenness of the manufacturer’s
products but also bring a positive crossover effect on sales through marketing efforts. The effect of SPE-labels, although
closely relevant to practice, is rarely considered in the literature. This motivates our study of the effect of SPE-labels, which
can improve the efficiency and effectiveness of the manufacturer’s production and the sales platform’s operation.
To generate implications of using such SPE-labels from both the profitability and environmental perspectives, this paper
models the interactions between the manufacturer and the sales platform in a green supply chain. Because the sales platform
can act as a marketplace or a reseller, we will analyse the effect of SPE-labels on the green level decision of the manufacturer
and marketing effort level of the sales platform, as well as their pricing decisions, subject to the agency contract and
wholesale price contract. We restrict our attention to the wholesale price contract and the agency contract due to their wide
use in practice as well as in prior research. The wholesale price contract and the agency contract are the two most common
and important contracts in supply chains, so investigating the effect of SPE-labels under these two contracts can lead to
fundamental research results. As examples in academia, previous studies have investigated sales platforms’ strategic choice
between the wholesale price contract and agency contract (Jiang, Jerath, and Srinivasan 2011; Tan and Carrillo 2017).
As examples in practice, Taobao.com adopts the agency contract, BestBuy.com adopts the wholesale price contract, and
Amazon and JD.com adopt hybrid contracts. Given the focus of our work, we refer the readers to Hong and Guo (2019)
for more sophisticated contracts in the green supply chain. In addition, the current research involves designing a contract to
help the supply chain reach full channel coordination by considering both the profitability and environmental impact. Our
analysis generates the following main results and managerial insights about the effect of SPE-labels under different supply
chain structures.
Firstly, we enrich the green supply chain operation literature by studying the agency contract in a green supply chain.
For the manufacturer, when the agency contract is used and consumer green awareness increases, the sale price declines
rather than increasing as it does under the wholesale price contract. This decline happens because, with the increase of
consumer green awareness, the relative influence of the SPE-labels becomes stronger than that of the marketing effort since
the SPE-labels and marketing effort have a complementary effect on consumers. Thus, the required marketing effort of the
sales platform will be lower, which incentivises the platform to reduce the commission rate. As a result, the manufacturer
faces a lower commission rate and a higher margin.
Secondly, our work contributes to the eco-label literature by exploring a new type of eco-label, one certified by the
sales platform, under two common supply chain contracts: the wholesale price contract and agency contract. Comparing
the profitability and environmental performance of the supply chain under these two contracts, the agency contract brings
a higher profit while the wholesale price contract results in a bigger environmental improvement. The driving force is the
relative influence of the SPE-label and marketing effort based on consumer green awareness.
Thirdly, we complement the supply chain coordination literature by proposing a platform-led revenue sharing contract
which can fully coordinate the supply chain, wherein the coordinator is the sales platform rather than the manufacturer. This
contract can improve both the profitability and environmental performance of the green supply chain rather than just bringing
economic benefit. Moreover, both the economic benefit and environmental performance will be improved if consumer green
awareness can be enhanced by publicity and education provided by the sales platform or the manufacturer.
The rest of this study is organised as follows. In Section 2, the relevant literature is reviewed to show the research gaps.
In Section 3, the Stackelberg game and utility function are introduced. This is followed by the problem description and
International Journal of Production Research 1487
analysis under the agency contract and wholesale price contract in Section 4 and Section 5. In Section 6, a platform-led
revenue sharing contract is proposed to coordinate the supply chain. Section 7 presents the comparison of the supply chain
performance for both profitability and environmental implications under all three contracts, and Section 8 concludes the
paper by summarising the contributions and future research directions.
2. Literature review
This paper is related to three streams of literature: operational decisions of green supply chain, the value of different eco-label
schemes, and research on the contract structure of sales platforms.
2.1. Operational decisions of green supply chain

Due to the increase of consumer environmental consciousness and the requirements of sustainable social development, the
literature on green supply chain management is growing (Linton, Klassen, and Jayaraman 2007; Wu and Pagell 2011; Dey,
Roy, and Saha 2019), with a particular focus on the coordination of economic and environmental implications. Sarkis and
Zhu (2018) reviewed the literature of the past 55 years in IJPR, and found that the call for incorporating environmental
sustainability into production research goes back for decades to the early years of IJPR publications. Several studies have
investigated the trade-off between profitability and environmental implications (Gouda, Jonnalagedda, and Saranga 2016;
Hong, Chu, and Yu 2016; Niu et al. 2018; Kusi-Sarpong, Gupta, and Sarkis 2019). For example, Kuiti et al. (2019) built a
game-theoretic model to investigate how green efforts influence the profitability and environmental waste in a green supply
chain. Niu et al. (2019a); Niu, Mu, and Li (2019b) showed that the coordination of economic and environmental sustainabil-
ity could be attained through adjusting an OEM’s procurement outsourcing. Also, other studies have explored the influence
of consumer environmental awareness on green supply chain management. In particular, Yalabik and Fairchild (2011) found
that consumer environmental consciousness can improve firms’ investments in environmental innovation. Incorporating cor-
porate social responsibility into the model, Zhu, Zou, and Zhang (2019) suggested that technology innovation and marketing
innovation can improve environmental performance and economic performance through consumer involvement.
We enrich the green supply chain operation literature by applying the agency contract in the green supply chain and
considering that environmentally conscious consumers can gain additional value from green products with an SPE-label.
An unexpected but interesting result is that when the agency contract is used and consumer green awareness increases, the
sale price declines rather than increasing as it does under the wholesale price contract.
2.2. Value of different eco-label schemes

Unlike conventional quality attributes, the actual greenness of a product is difficult for consumers to observe directly
(Baksi and Bose 2007). Therefore, many manufacturers publicise their environmental efforts to consumers through eco-
labels, whose valuation for consumers and firms has been widely studied in environmental economics research (Chun and
Bidanda 2013; Castka and Corbett 2016). Studies have found that products with an eco-label are more popular with con-
sumers, but the environmental implications are not necessarily positive because of over-consumption. Several eco-label
schemes have been studied in prior literature, including self-labels, eco-labels of NGOs, and government regulation (Jor-
jani, Leu, and Scott 2004; Murali, Lim, and Petruzzi 2019). Considering government regulation, Zhu and Sarkis (2007)
empirically found that high regulatory pressures encourage manufacturers to make green purchases and investments, result-
ing in better environmental performance. For self-labels and NGO eco-labels, Murali, Lim, and Petruzzi (2019) showed that
credibility asymmetry between two firms drives different eco-label schemes in a competitive environment. To be specific,
the firm with low credibility usually chooses eco-labels of NGOs while the firm with high credibility may choose self-labels
or NGO eco-labels. Also, Heyes and Martin (2016) and Fischer and Lyon (2014) considered the problem of multiple eco-
labels coexisting in the market, and the latter found that the competition between voluntary standards by NGOs and industry
standards may lead to lower environmental benefits compared to having only voluntary standards.
Our study contributes to the literature by proposing a new type of eco-label, which is certified by the sales platform. The
sales platform, acting as a marketplace or a reseller, is a part of the green supply chain, and, as discussed above, SPE-labels
are also more effective than self-labels and eco-labels of NGOs from different perspectives. It is interesting to explore the
profitability and environmental implications of SPE-labels for the green supply chain.
2.3. Contract structure of sales platform

Many online sales platforms have emerged with the development of e-commerce. Because the sales platform can act as a
marketplace or a reseller, the supply chain mode may use the agency contract or wholesale price contract, so our paper is
1488 X. Guo et al.
Table 1. Summary of relevant literature.

Major Concern Most relevant literature Research gap
Operational decisions of green Linton, Klassen, and Jayaraman (2007), These papers focus on the coordination of
supply chain Yalabik and Fairchild (2011), Hong, economic and environmental implications in a
Chu, and Yu (2016), Niu et al. (2019a), supply chain structure. We enrich this literature
Kuiti et al. (2019), Zhu, Zou, and by incorporating the agency contract into this
Zhang (2019), etc. model, which has not been done before.
Value of different eco-label Baksi and Bose (2007), Chun and In contrast to these eco-label studies that primarily
schemes Bidanda (2013), Fischer and consider self-labels and eco-labels from NGOs,
Lyon (2014), Heyes and Martin (2016), our paper explicitly investigates a new type
Castka and Corbett (2016), Murali, Lim, of eco-label (SPE-labels) certified by the sales
and Petruzzi (2019), etc. platform. From some perspectives, SPE-labels
are more effective than self-labels and NGO
eco-labels.
Contract structure of sales Jiang, Jerath, and Srinivasan (2011), Tan The sales platform contract literature merely
platform and Carrillo (2017), Tian et al. (2018), analyses sales the platforms’ strategic choices
Song and Gao (2018), Zhu, Li, and between the agency contract and wholesale
Zhao (2018), etc. price contract from the economic perspective.
We additionally explore the environmental
implication of sales platform contract and
propose a platform-led revenue sharing contract
to fully coordinate the green supply chain
where the coordinator is the sales platform
rather than the manufacturer.
also related to the literature about the contract structure of sales platforms. Several studies analyse sales platforms’ strate-
gic choices between the agency contract and wholesale price contract from the economic perspective (Jiang, Jerath, and
Srinivasan 2011; Johnson 2018). For example, Tan and Carrillo (2017) indicated that the agency contract outperforms the
wholesale price contract, because, under the agency contract, the partners can negotiate the revenue sharing proportion and
coordinate the supply chain in digital goods industries. Considering two competing upstream suppliers, Tian et al. (2018)
compared the marketplace, reseller, and hybrid modes and found that the competition intensity and order-fulfilment cost
both significantly influence the sales platform’s choice. Although the agency contract allows partners to negotiate the rev-
enue sharing proportion in advance, this type of contract cannot fully coordinate the supply chain. Other studies have
explored the green supply chain coordination contract (Linton, Klassen, and Jayaraman 2007; Zhu, Sarkis, and Lai 2012;
Swami and Shah 2013; Wang et al. 2019). These studies adjust the price, order quantity, cost sharing, or revenue sharing to
coordinate the supply chain, which can improve the overall performance of the supply chain, not just maximise the profit
of a stakeholder. For example, Li et al. (2016) designed a quantity-flexibility contract which performed well, and Awan,
Kraslawski, and Huiskonen (2018) revealed that contract governance might be effective for collaboration. Also, Zhu, Li,
and Zhao (2018) designed two cost-sharing contracts which, put in place by a dominant player, cannot fully coordinate the
supply chain but do improve the profitability of both stakeholders. In a context close to ours, Song and Gao (2018) designed
a retailer-led revenue sharing contract which can lead to greener products and higher profits, but the supply chain still cannot
achieve full coordination.
Different from the existing literature, we incorporate the agency contract into the green supply chain model to investi-
gate how the agency contract influences the profitability and environmental implications of the green supply chain. We also
propose a platform-led revenue sharing contract to fully coordinate the supply chain where the coordinator is the sales plat-
form rather than the manufacturer, and we prove this contract can improve both profitability and environmental performance
rather than just bringing economic benefit.
Table 1 presents a summary of relevant literature and the research gaps addressed in the current study.
3. Methodology
In this section, we introduce the methodology used in this paper – the Stackelberg game, and discuss the utility function
adopted to characterise the consumer utility and demand.
The Stackelberg game model is named after the German economist Heinrich Freiherr von Stackelberg. He published
Market Structure and Equilibrium in 1934, wherein this model was first proposed (Von Stackelberg 2010). Different from
the Cournot model and Bertrand Model, where the position of competing players in the market is equal, the position of the
competitors is asymmetric in a Stackelberg game. Thus, competing players are not making decisions at the same time, but
rather making decisions in some defined order. This strategic game involves one leader and one or more followers, who
interact with each other and achieve their optimal decision equilibrium. The player with a strong position or high bargaining
power is the leader, who moves first. Other players with a low position are followers, who move after the leader (Simaan
and Cruz 1973). As the follower can observe the decision of the leader before making a decision, the Stackelberg game
is solved by backward induction (Rasmusen 2007). Specifically, the follower makes a decision to maximise the follower’s
objective and does so knowing the leader’s action. The leader has first mover advantage but takes into account the fact that
the follower’s decision is made with full knowledge of the first move.
The Stackelberg game has been widely adopted in the field of marketing and operation management research to study
the interactions among several asymmetrical players, such as manufacturers, retailers, sales platforms, and suppliers (Li
et al. 2016; Tan and Carrillo 2017; Geng, Tan, and Wei 2018; Kuiti et al. 2019). For example, Tian et al. (2018) used a
Stackelberg game to investigate an online sales platform’s strategic choice of being a marketplace, reseller, or hybrid. Ma
and Xie (2016) adopted this method to study the competition between a manufacturer and its retailer. In this paper, to explore
the effects of SPE-labels in a green supply chain, we explore the interactions among the sales platform, manufacturer,
and consumers. The sales platform and the manufacturer decide the product greenness, sale price, and marketing effort
to maximise their own profit. Due to their different roles and bargaining power, they make decisions sequentially. For
example, under the traditional wholesale price contract, the manufacturer has a dominant position; it produces a green
product and determines the wholesale price of the product. Observing the product greenness and wholesale price, the sales
platform, acting as a reseller, decides the sale price and marketing effort. Differently, under the agency contract, the sales
platform, acting as a marketplace, has more bargaining power than the manufacturer. Therefore, in this paper, we formulate
a Stackelberg game model to characterise the decisions of the sales platform and the manufacturer.
After the manufacturer and sales platform determine the green level and pricing of the product, the consumer decides
whether to purchase the product based on consumer utility. The consumer utility of a product depends on personal prefer-
ence, product characteristics, and price. The market demand for the product is realised after each consumer chooses whether
to purchase the product. In the marketing and economic literature, most research assumes that consumer utility is a function
of valuation, product price, product greenness, and effort (Levitt 1960; Desai and Srinivasan 1995; Desiraju and Moor-
thy 1997). For example, u = V − p + ke + t in a green supply chain (Hong and Guo 2019), and uij = R − pij − td + asij
in a competitive environment (Pun 2013).
In this paper, the consumer utility and demand depend on the basic valuation for product functionality, product price,
product greenness, and the marketing effort of the sales platform. Based on classical economic theory and previous empir-
ical research findings, we also adopt a utility function to describe consumer utility. Such a function is sufficient to capture
the features that consumer utility and demand decrease in product price but increase in product greenness and marketing
effort. Several studies have empirically verified the relationship between product price, product greenness, marketing effort,
and consumer purchase behaviour (Van den Bulte and Lilien 2001; Mukhopadhyay, Su, and Ghose 2009). For example,
Gleim et al. (2013) claimed that providing detailed information about product greenness can increase the consumers’ pur-
chase intention, and that price is the main barrier hindering the consumers’ purchases. Also, it is generally agreed that the
importance of the marketing effort is positively related to product popularity and consumer purchase intention in business
(Levitt 1960; Mukhopadhyay, Su, and Ghose 2009). In particular, Van den Bulte and Lilien (2001) empirically showed
that marketing efforts play an important role in product diffusion. In this paper, the product’s green design and the sales
platform’s marketing effort are assumed to influence the consumers’ purchase behaviour. Thus, we adopt a utility function
to describe the consumer utility.
4. Problem description
In this paper, a supply chain model is built to study how SPE-labels affect the profitability and environmental performance of
the green supply chain, assuming different supply chain structures. The methodology in this paper is a Stackelberg game in
a green supply chain that consists of a sales platform acting as a marketplace or a reseller, a manufacturer producing green
products, and a market of environmentally conscious consumers. According to the different roles of the sales platform,
the supply chain structure may involve the agency contract or wholesale price contract. Under the agency contract, the
sales platform serves as a marketplace and supply chain leader, deciding the commission fee and the marketing effort, and
the manufacturer is the follower, deciding the sale price and the product greenness. Under the wholesale price contract,
the manufacturer is the leader, deciding the wholesale price and the product greenness, and the sales platform serves as
a reseller, deciding the sale price and the marketing effort. Next, we describe the setting of the consumer utility and the
demand function.
In the green supply chain, the manufacturer and sales platform fulfil their responsibilities for sustainability by providing
and promoting green products to consumers. The manufacturer produces a green product with greenness g, which represents
1490 X. Guo et al.
the percentage emission reduction by each unit product relative to the traditional product (0 ≤ g ≤ 1). Because the greenness
is a quality dimension, the investment is considered as a convex increasing function of g and generally defined as kgβ with
β > 1 in the literature (Kim, Cohen, and Netessine 2007; Ling, Guo, and Yang 2014). Without fundamentally changing the
insights afforded by the model, we assume that the required investment for product greenness g is a quadratic function with
k = 1 and β = 2, i.e. g2 , which is commonly used in the research and development of technology production (Tyagi 2004;
Shi, Liu, and Petruzzi 2013). The sales platform evaluates the product greenness and decides whether to give the product
its SPE-label. For the manufacturer, the specific labelling criteria for the SPE-label is not known in advance. The rule is
that the higher the green level of the product, the more likely it is to get the SPE-label. Therefore, the probability that the
product can be labelled can be denoted by g, and the probability of the product not getting the SPE-label is (1 − g). The
sales platform, whether it is a marketplace or a reseller, promotes the product to consumers. The marketing effort level is
denoted by e, and higher values of e can increase product visibility and the buying interest of consumers, thereby increasing
consumer utility. Similarly with the required investment for product greenness of the manufacturer, the marketing effort cost
for the sales planform is assumed to be e2 .
Let v denote the consumers’ basic valuation for product functionality; v is a nonnegative random variable. In this paper, v
is assumed to follow a uniform distribution, that is, v ∼ U[0, 1], and the market size is normalised to 1. For environmentally
conscious consumers, SPE-labels on green products will increase the willingness to pay (Morrison 2011). Let α denote
the consumers’ preference for a product with an SPE-label, which also indicates the consumer’s green awareness. If the
product is eco-labelled by the sales platform, consumers can perceive the environmental value of α. Otherwise, the consumer
perceives an environmental value of zero. Intuitively, the green investment is no less than the marginal environmental value,
i.e. g2 ≥ αg (Hong and Guo 2019), so 0 ≤ α ≤ 1; otherwise, the manufacturer has no incentive to invest in making the green
product. Since the sales platform has good authority and can provide endorsement through the SPE-label, it is reasonable
to assume that consumers believe fully in the SPE-label (Fischer and Lyon 2014; Murali, Lim, and Petruzzi 2019). The sale
price of the product decided by the manufacturer or the sales platform is p. Using the terminology above, in this paper, the
consumers’ utility is expressed as the following utility function:
u = g(v − p + α + e) + (1 − g)(v − p + e) = v − p + αg + e. (1)
The consumer will choose to buy the product if his or her utility for the product is non-negative, i.e. u ≥ 0; otherwise,
the consumer will not buy the product. Let D(p, g, e) denote the market demand of the green product. Therefore, the green
product demand is D(p, g, e) = P{v ≥ p − αg + e}. As the consumers’ basic valuation for product functionality v is assumed
to follow a uniform distribution, that is, v ∼ U[0, 1], and the market size is normalised to 1, the demand for green product
is given by:
D(p, g, e) = P{v > p − αg − e} = 1 − p + αg + e. (2)
In the next section, we will analyse the optimal decisions of the players under different supply chain structures and explore
the profitability and environmental implications of having SPE-labels in the green supply chain.
5. Decision analysis
In this section, we investigate the green supply chain decisions under the agency contract and wholesale price contract.
Under the agency contract, the sales platform is the leader, whereas, under the wholesale contract, the manufacturer is the
leader.
5.1. Agency contract

In this subsection, we explore the decision problem of the green supply chain under the agency contract. The subscript a
is used to denote the agency contract. The dominant sales platform (e.g. Amazon, JD.com, Red Star Macalline) acts as the
leader in this scenario. The sales platform serves as a marketplace and yields the pricing power to the manufacturer who
sells the product to consumers directly in the marketplace. The sales platform draws a commission, that is, a proportion of
the manufacturer’s revenue at a rate of ka , which is determined by the sales platform (Tian et al. 2018). The commission
rate ka can be regarded as the referral fee from the sales platform (Geng, Tan, and Wei 2018). On the Amazon platform, the
commission fee ka varies from 6% to 25% of the sale price depending on the product category, while for JD.com, the fee
for most product categories ranges from 5% to 12% (Tian et al. 2018).
Assuming the agency contract, a sales platform-manufacturer-consumer Stackelberg game is built to describe the prob-
lem with the following sequence of events (seeing in Figure 1). The sales platform first determines the commission rate ka ,
Figure 1. Sequence of events under the agency contract.
after which the manufacturer decides the product greenness ga and the sale price pa . Knowing the manufacturer’s decisions,
the platform determines the marketing effort ea .
Using backward induction, the first step is to explore how the sales platform decides the marketing effort to maximise
profit. The sales platform receives a commission from the manufacturer’s revenue and pays a marketing effort cost, so its
profit function is given by:
max πap (ea ) = ka pa (1 − pa + αga + ea ) − e2a . (3)
ea
p
Because the profit of sales platform πa (ea ) is concave in ea , the unique best response function of ea in reaction to ka , pa , and
p
ga is obtained through the first-order condition dπa /dea = 0,
ka pa
e∗a (ka , pa , ga ) = .
2
Given the commission rate ka , the manufacturer decides the product greenness ga and the sale price pa to maximise profit.
The manufacturer obtains the remaining sales revenue and pays for the production cost of the green product. Without loss
of generality, the marginal production cost of the product is assumed to be zero (Liu and Tyagi 2011). The problem for the
manufacturer is:
max πam (pa , ga ) = (1 − ka )pa (1 − pa + αga + ea ) − ga2 . (4)
pa ,ga
By substituting the best response function of e∗a (ka , pa , ga ) into Equation (4), we solve the decision problem of the manufac-
turer. Because the profit function of the manufacturer πam (pa , ga ) is jointly concave in (pa ,ga ), the unique optimal solution
pair (p∗a , ga∗ ) is obtained as follows:
2 α − αka
p∗a (ka ) = , ga∗ (ka ) = .
4 − 2ka − (1 − ka )α 2 4 − 2ka − (1 − ka )α 2
Finally, the sales platform determines the commission rate ka to maximise profit. The profit function of the manufacturer is
rewritten as follows:
max πap (ka ) = ka pa (1 − pa + αga + ea ) − e2a . (5)
ka
p
By substituting above results into Equation (5), the profit function of the sales platform πa (ka ) is concave in ka . The unique
optimal solution ka∗ is:
8
ka∗ = 2 − .
8 − α2
Substituting ka∗ into the best response function of e∗a (ka , pa , ga ), p∗a (ka ), and ga∗ (ka ), the optimal decisions of the players under
the agency contract are shown in the following lemma (all proofs are given in the appendix):
Lemma 1 The optimal decisions of the players in the green supply chain under the agency contract are:
8 α3 2(8 − α 2 ) 2
ka∗ = 2 − , ga∗ = , p∗a = , e∗a = .
8 − α2 16 − α 4 16 − α 4 4 + α2
1492 X. Guo et al.
Substituting Lemma 1’s results into Equation (2), Equations (3), and (4), the market demand of the product and the
profits of stakeholders are:
8 4 α2
D∗a = , πap∗ = , πam∗ = .
16 − α 4 16 − α 4 16 − α 4
Let π sc denote the total supply chain profit, which is the sum of the profits of the manufacturer and the sales platform. Under
the agency contract, the supply chain profit is given by:
1
πasc∗ = πam∗ + πap∗ = .
4 − α2
Through comparative static analysis, this paper determines how the consumer green awareness α influences the optimal
decisions of the players and stakeholders’ profits under the agency contract; the results are stated in Proposition 1.
Proposition 1 The optimal decisions of the players and stakeholders’ profits in the green supply chain under agency
contract have the following properties:
dka∗ dga∗ dp∗a de∗
(i) < 0, > 0, < 0, a < 0;
dα dα dα dα
dD∗a
p∗
πa πam∗ π sc∗
(ii) > 0, > 0, > 0, a > 0.
dα dα dα dα
Proposition 1 gives some unexpected but interesting results about the effect of consumer green awareness on the optimal
decisions of the players and the stakeholders’ profits in the green supply chain under the agency contract. Specifically, when
the consumer green awareness is higher, (i) the manufacturer produces a greener product but sets a lower sale price, (ii) both
the marketing effort and the commission rate of the sales platform become lower, and (iii) the total supply chain profit is
higher. These results are interpreted as follows. Since the SPE-labels and marketing effort have a complementary effect on
consumers, as consumer green awareness increases, the relative influence of the SPE-label becomes stronger compared to
that of the marketing effort. The manufacturer has the incentive to produce a greener product to get the SPE-label. Thus, the
sales platform can reduce its marketing effort and the commission rate to get greener products and higher profit. Given that
the commission rate is reduced, the manufacturer can obtain higher margin and has the motivation to lower the sale price to
attract more consumers. Therefore, as the sale price falls and consumer green awareness increases, more consumers choose
to buy the SPE-labelled product, so profits increase for both the sales platform and manufacturer, and the profit of the total
supply chain also increases.
5.2. Wholesale price contract

This subsection explores the decision problem of the green supply chain under the wholesale price contract, a contract which
is widely used in reality. The subscript w denotes the wholesale price contract. Assuming the wholesale price contract is used,
a manufacturer-sales platform-consumer Stackelberg game is built to describe the problem with the following sequence of
events (seeing in Figure 2). The manufacturer, as the leader, decides the product greenness gw and wholesale price ww to the
sales platform to maximise its profit. The sales platform, acting as the follower, decides the sale price pw and the marketing
effort ew to maximise its profit.
Figure 2. Sequence of events under the wholesale price contract.

Using backward induction, we first investigate the decision problem of the sales platform. The sales platform buys the
product from the manufacturer and resells to consumers and pays for marketing effort cost. Therefore, the profit function of
the sales platform is
max πwp (pw , ew ) = (pw − ww )(1 − pw + αgw + ew ) − e2w . (6)
pw ,ew
Maximising πw (pw , ew ), which is jointly concave in (pw ,ew ), the unique best response function of (p∗w ,e∗w ) in reaction to ww
p
p p
and gw are obtained through the first-order condition dπw /dpw = 0, dπw /dew = 0.
p∗w (ww , gw ) = 13 (2 + ww + 2αgw ), e∗w (ww , gw ) = 13 (1 − ww + αgw ).
The manufacturer, acting as the leader, decides the product greenness and the wholesale price to the sales platform, and pays
for the green cost. The profit function of the manufacturer is given by
max πwm (ww , gw ) = ww (1 − pw + αgw + ew ) − gw2 . (7)

ww ,gw
By substituting the best response functions of the sales platform into Equation (7), we solve the decision problem of the
manufacturer. As the profit function of the manufacturer πwm (ww , gw ) is jointly concave in (ww ,gw ), the optimal solution pair
(w∗w , gw∗ ) is uniquely determined as follows:
3 α
w∗w = , gw∗ = .
6 − α2 6 − α2
Therefore, the optimal solutions of the players under the wholesale price contract are obtained, as expressed in the following
lemma:
Lemma 2 The optimal decisions of the players in the green supply chain under the wholesale price contract are:
3 α 5 α
w∗w = , gw∗ = , p∗w = , e∗w = .
6 − α2 6 − α2 6 − α2 6 − α2
Substituting w∗w , gw∗ , p∗w , and e∗w into Equations (2), (6), and (7), the market demand of the product and the profits of
stakeholders are obtained as follows:
2 3 1 9 − α2
D∗w = , πwp∗ = , πwm∗ = , πwsc∗ = .
6 − α2 (6 − α 2 )2 6 − α2 (6 − α 2 )2
Through comparative static analysis, we explore how the consumer green awareness α influences the optimal decisions of
the players and the stakeholders’ profits under the wholesale price contract. The results are expressed in Proposition 2.
Proposition 2 The optimal decisions of the players and the stakeholders’ profits in the green supply chain under the
wholesale price contract have the following properties:
dw∗w dgw∗ dp∗w de∗
(i) > 0, > 0, > 0, w > 0;
dα dα dα dα
dD∗w
p∗
πw πwm∗ πwsc∗
(ii) > 0, > 0, > 0, > 0.
dα dα dα dα
Proposition 2 indicates that higher green awareness among consumers induces higher optimal values in the parameters
decided by the players and better economic performance. Specifically, the manufacturer produces a greener product and sets
a higher wholesale price, and the sales platform sets a higher sale price and pays more for the marketing effort. Moreover,
more consumers choose to buy the product, so both the manufacturer and the sales platform gain higher profits. As consumer
green awareness increases, the consumers are more willing to pay a higher price, and the influence of the SPE-label also
becomes greater. The sales platform can increase the sale price and marketing effort to yield higher demand and profit, and
the manufacturer also benefits from higher market demand and has the motivation to produce a greener product both to gain
the SPE-label and increase the wholesale price. In general, a higher green awareness of consumers encourages better supply
chain economic performance.
1494 X. Guo et al.
5.3. Agency contract vs. wholesale price contract

In this subsection, we compare the optimal decisions of the players and the stakeholders’ profits, under the agency con-
tract and wholesale price contract, to investigate the supply chain performance. The results are shown in the following
proposition.
Proposition 3 Under the agency contract and wholesale price contract, the optimal decisions of the players and
stakeholders’ profits satisfy the following relationships:
(i) ga∗ ≤ gw∗ , e∗a > e∗w , when 0 ≤ α ≤ α ∗ , p∗a ≥ p∗w , otherwise, p∗a < p∗w ;
(ii) D∗a > D∗w , πa > πw , πam∗ < πwm∗ , πasc∗ ≥ πwsc∗ .
p∗ p∗
Proposition 3 reveals that neither the agency contract nor the wholesale price contract can dominate the other in all
aspects. To be specific, the agency contract can improve the sales platform’s marketing effort and its profit, the market
demand, and the total supply chain profit, but it will reduce product greenness and the manufacturer’s profit. Besides, the
sale price is higher under the agency contract when consumer green awareness is relatively low, and conversely, the sale
price is lower under the agency contract when consumer green awareness is high.
Before explaining these results, we compare the role of the manufacturer and sales platform under these two contracts.
First, the negotiation power of the manufacturer is stronger under the wholesale price contract. Under the wholesale price
contract, the manufacturer is the leader and adjusts the sale price and marketing effort of the sales platform by deciding
the wholesale price and product greenness. The income of the manufacturer is the wholesale revenue, and the manufacturer
determines the wholesale price. On the contrary, under the agency contract, the sales platform is the leader and controls the
performance of the supply chain by deciding the commission rate. The manufacturer’s income is part of the sales revenue,
but the sales platform determines the revenue sharing proportion. Therefore, the manufacturer has strong negotiation power
under the wholesale price contract, whereas the sales platform has strong negotiating power under the agency contract.
Second, the supply chain is more integrated under the agency contract. Under the wholesale price contact, the manufacturer
decides the wholesale price to maximise the wholesale revenue, and the sales platform decides the sale price to maximise the
sales revenue. The two players are quite independent and serious double marginalisation occurs. Under the agency contract,
they share the sales revenue, and the decision-making tends to integrate the supply chain.
Noting the above differences between these two contracts, the first result in Proposition 3 can be explained as follows.
Considering the product greenness, under the wholesale price contract, the manufacturer can obtain all the wholesale rev-
enue, so the manufacturer has an incentive to produce a more environmentally friendly product to attract more consumers.
However, under the agency contract, the manufacturer does not gain the wholesale revenue and only shares the sales rev-
enue with the sales platform, so it does not have enough motivation to produce greener product. Considering the marketing
effort, under the agency contract, the sales platform can only obtain income from indirect sales revenue, which induces the
sales platform to make greater marketing effort to attract consumers. Considering the sale price, based on Propositions 1
and 2, the sale price increases with consumer green awareness under the wholesale price contract but decreases under the
agency contract. When consumer green awareness is quite low (0 ≤ α ≤ α ∗ ), the relative impact of the marketing effort
is strong. As the marketing effort under the agency contract is much larger than that under the wholesale price contract,
the manufacturer can set a higher sale price under the agency contract. On the contrary, when consumer green awareness
is quite high (α ∗ < α ≤ 1), the relative influence of the SPE-label is strong. As the product greenness under the agency
contract is lower than that under the wholesale price contract, the manufacturer can only set a lower sale price under the
agency contract.
Considering the higher market demand under the agency contract in the second statement in Proposition 3, the driving
force is that, under the agency contract, the marketing effort is quite high, which could offset the impact of low product
greenness and serve more consumers. In contrast to the wholesale price contract, under the agency contract, the leader is the
sales platform. Therefore, the sales platform can obtain higher profit under the agency contract, and the manufacturer can
obtain higher profit under the wholesale price contract. As the supply chain is more integrated under the agency contract,
the total supply chain profit also becomes higher.
6. Full supply chain coordination

Proposition 3 states that neither the agency contract nor the wholesale price contract can dominate each other in both
economic performance and environmental improvement. Under both the agency contract and the wholesale price contract,
the supply chain is decentralised. In the decentralised supply chain, each stakeholder makes decisions which maximise that
stakeholder’s profit. The objective of the integrated supply chain is different: to maximise the total supply chain profit.
Therefore, neither of these two contracts can achieve optimal decisions like integrated supply chains. To be specific, on the
one hand, from the perspective of profitability, the sales platform prefers the agency contract while the manufacturer prefers
the wholesale price contract. On the other hand, looking at the performance of the supply chain, the agency contract brings a
higher profit while the wholesale price contract results in greater environmental improvement. Consequently, in this section,
we try to design an autonomous coordination contract to improve the supply chain performance in both profitability and
environmental perspective. First, a centralised situation is considered. The subscript c denotes the centralised system. The
product greenness gc , the sale price pc , and the marketing effort ec are designed to maximise the total supply chain profit.
The problem in the centralised system is given by
max πcsc (gc , pc , ec ) = pc (1 − pc + αgc + ec ) − gc2 − e2c . (8)
gc ,pc ,ec
The total profit function of the supply chain πcsc (gc , pc , ec ) is jointly concave in (gc , pc , ec ), so the unique optimal
solution pair (gc∗ , p∗c , e∗c ) is obtained as stated in the following lemma:
Lemma 3 The optimal decisions of the players in the green supply chain in the centralised system are:
α 2 1
gc∗ = , p∗c = , e∗c = .
3 − α2 3 − α2 3 − α2
Substituting gc∗ , p∗c , and e∗c into Equations (2) and (8), the market demand of the product and the total profit of the supply
chain in the centralised system are:
2 1
D∗c = , πcsc∗ = .
3 − α2 3 − α2
Recall that the total profit of the green supply chain under the agency contract and the wholesale price contract are πasc∗ =
1/(4 − α 2 ) and πwsc∗ = (9 − α 2 )/(6 − α 2 )2 , respectively. Neither the wholesale price contract nor the agency contract can
fully coordinate the supply chain. Similar to the situation under the wholesale price contract, we find that a higher consumer
level of green awareness induces higher optimal price decisions and better supply chain economic performance in the
centralised system because the influence of the SPE-labels becomes greater and consumers are willing to pay a higher price
for the green product.
In prior research, the sales platform is mainly assumed to be a reseller. Under the agency contract in this paper, the
sales platform acts as a marketplace and draws a commission fee from each transaction. Shy and Wang (2011) suggested
that such a commission fee could be regarded as a revenue sharing mechanism. However, the supply chain still cannot be
fully coordinated by the agency contract, and the resulting product greenness is quite low. Based on the agency contract, a
platform-led revenue sharing contract is proposed to coordinate the supply chain for better supply chain performance; this
is the type of contract which is used by emerging online retailers (Song and Gao 2018).
Under the platform-led revenue sharing contract, the sales platform is still the leader of the coordination and it designs
the contract, and this control enables the manufacturer to implement coordinated actions. The sales platform first detects the
product greenness to decide whether to SPE-label the product, then designs the coordination contract based on the product
greenness and the sales revenue. The subscript rs denotes the platform-led revenue sharing contract. The sales platform
offers a coordination contract (krs , ers ) to the manufacturer. Then the manufacturer optimises its decisions (grs , prs ). The
profit function of the sales platform and the manufacturer are given by
max πrsp (krs , ers ) = krs prs (1 − prs + αgrs + ers ) − e2rs ,
krs ,ers
(9)
max πrsm (prs , grs ) = (1 − krs )prs (1 − prs + αgrs + ers ) − grs
2
.
prs ,grs
Let φ denote the proportion of the total supply chain revenue that the manufacturer could obtain. The coordination contract
offered by the sales platform is as follows:
Proposition 4 The sales platform can coordinate the supply chain through the platform-led revenue sharing contract by
setting the following contract terms:
(1 − φ)grs2
φe∗rs
krs = 1 − φ − + ,
prs Drs prs Drs
1
e∗rs = .
3 − α2
1496 X. Guo et al.
Figure 3. Revenue proportion of the manufacturer.
Substituting the coordination contract into the manufacturer’s profit function, we can get πrsm = φ(prs Drs − grs
2
− e∗2
rs ) =
φπrssc ,
that is, the optimisation problem of the manufacturer is equivalent to maximising the profit of the total supply chain.
The optimal decisions of the players equal those in the centralised system, and the supply chain achieves full coordination.
The optimal decisions and realised profits of the players under the platform-led revenue sharing contract are:
∗ α 2 1 1−φ φ 1
grs = , p∗rs = , e∗rs = , πrsp∗ = , πrsm∗ = , πrssc∗ = .
3 − α2 3 − α2 3 − α2 3 − α2 3 − α2 3 − α2
The maximal total supply chain profit can be guaranteed by adopting the platform-led revenue sharing contract. It is notewor-
thy that this platform-led revenue sharing contract is based on the agency contract. To ensure that both the sales platform and
p∗ p∗
the manufacturer benefit from the coordination contract, the conditions that need to be met are πrsm∗ ≥ πam∗ and πrs ≥ πa .
Thus, comparing the players’ profits under the agency contract and platform-led revenue sharing contract, the revenue
proportion of the manufacturer φ follows:
α 2 (3 − α 2 ) 4 + 4α 2 − α 4
≤ φ ≤ .
16 − α 4 16 − α 4
As shown in Figure 3, since α 16−α

(3−α ) 4+4α −α −α
) − ( α 16−α
(3−α )
2 2 2 4 2 4 2 2
4 , 16−α 4
, and ( 4+4α
16−α 4 4 ) all increase with α, the scope application of the
coordination contract becomes larger and the revenue proportion of the manufacturer also becomes higher as the consumer
green awareness increases. The reason is that the relative influence of the SPE-labels becomes stronger as consumer green
awareness increases. As the one deciding the product greenness, the manufacturer has stronger negotiation power.
Recall the results given in Proposition 3, the agency contract cannot improve all players’ benefits compared with the
wholesale price contract: the sales platform becomes more profitable, whereas the manufacturer is worse off. Next, we
examine whether the platform-led revenue sharing contract can benefit all players compared to both the agency contract
and wholesale price contract. In other words, we want to determine whether the profit of the manufacturer can be higher
than that under the wholesale price contract (πrsm∗ ≥ πwm∗ > πam∗ ), and the profit of the sales platform can be higher than that
p∗ p∗ p∗
under the agency contract (πrs ≥ πa > πw ). We get the revenue proportion of the manufacturer φ as follows:
3 − α2 4 + 4α 2 − α 4
≤φ≤ .
6−α 2 16 − α 4
√
This condition is only meaningful when the consumer green awareness α is quite large (i.e. 27 (9 − 39) ≤ α ≤ 1). As
explained above, with the increase of green awareness, the relative influence of the SPE-labels becomes stronger and the
manufacturer has stronger negotiation power, which induces the manufacturer to produce a greener product and get higher
profit. The results also reveal that the more consumers are concerned about the environment, the more motivated the sales
platform is to coordinate the supply chain and produce better supply chain performance. Therefore, the sales platform or
manufacturer should conduct publicity and education campaigns to raise green awareness among consumers. Such activities
are seen in reality, such as the Red Star Macalline’s ‘Green and Environmental Week’.
As mentioned previously, this platform-led revenue sharing contract is based on the agency contract, and the manufac-
turer will obtain higher profit under the wholesale price contract than the agency one. As a result, the platform-led revenue
sharing contract will not be applicable if the coordinated supply chain profit is smaller than the sum of the platform profit
under the agency contract and the manufacturer profit under the wholesale price contract. Fortunately, this platform-led
revenue sharing contract can benefit all players when green awareness is quite high. In other words, the profit of the manu-
facturer is higher than that under the wholesale price contract, and the profit of the sales platform is higher than that under
the agency contract, simultaneously.
7. Discussion
In the previous sections, we investigated the green supply chain decisions under three different contracts. In this section, we
compare the optimal decisions of the players and the supply chain performances under these three contracts.
Proposition 5 The optimal decisions of the players in the green supply chain under the three contracts satisfy the
following relationships:
∗
(i) grs ≥ gw∗ ≥ ga∗ ;
(ii) pa ≥ p∗w > p∗rs , if 0 ≤ α ≤ α ∗ ; p∗w > p∗a ≥ p∗rs , if α ∗ < α ≤ α ∗∗ ; p∗w ≥ p∗rs > p∗a , if α ∗∗ < α ≤ 1;
∗
(iii) e∗a ≥ e∗rs > e∗w , if 0 ≤ α ≤ α ∗ ; otherwise, e∗rs > e∗a > e∗w ;
(iv) D∗rs > D∗a > D∗w .
Proposition 5 reveals that, as illustrated in Figure 4, the platform-led revenue sharing contract can improve the supply
chain performance overall (producing the highest product greenness, low sale price, high marketing effort, and highest
market demand).
Similar to the situation in Proposition 3, the product greenness is the highest under the platform-led revenue sharing
contract, whereas, it is the lowest under the agency contract. Because of the transfer of supply chain leadership and the supply
chain integration, the manufacturer does not have the motivation to produce a greener product under the agency contract
while it produces the greenest product to coordinate the supply chain under the platform-led revenue sharing contract.
∗
Some further analysis demonstrates that the product greenness difference between these contracts (grsa = grs − ga∗ and
Figure 4. Optimal decisions of the players. (a) Product greenness. (b) Sale price. (c) Marketing effort. (d) Market demand.
1498 X. Guo et al.
∗
grsw = grs − gw∗ ) increases with the consumer green awareness, α, which reveals that the advantage of the platform-led
revenue sharing contract in producing a greener product is more significant when consumer green awareness increases.
The analysis results show that the sale price under the platform-led revenue sharing contract is basically the lowest,
and it increases with green awareness. The platform-led revenue sharing contract fully coordinates the supply chain, which
eliminates the double marginalisation, so the manufacturer can set the lowest price to attract more consumers. With the
increase of green awareness, the manufacturer can also raise the sale price to gain higher profit. Furthermore, analysing
the marketing effort under these three contracts, the sales platform exerts the lowest marketing effort under the wholesale
price contract because it is a follower of the supply chain with a small voice and does not have much motivation for such
effort. Under the platform-led revenue sharing contract, supply chain coordination enables the manufacturer to provide a
greener product, and the sales platform can reduce its marketing investment. With the increase of green awareness, both
the product greenness and marketing effort increase, resulting in a higher sale price and higher market demand under the
platform-led revenue sharing contract. Due to the high product greenness, high marketing effort, and low sale price under
the platform-led revenue sharing contract, the market demand for the green product, in this case, is significantly higher than
when using the other two contracts.
In addition to the economic benefits of the partners in the green supply chain, we use social welfare to analyse societal
impacts. Social welfare consists of three parts: the total supply chain profit, the consumer surplus, and the environmental
impact (Krass, Nedorezov, and Ovchinnikov 2013; Hong and Guo 2019). The total supply chain profit (denoted as π sc )
equals the sum of the profits of the manufacturer and the sales platform. The consumer surplus (denoted as CS) shows the
surplus from consuming the green product. The environmental impact (denoted as EI) signifies the product emissions. Since
the product greenness under the agency contract is the lowest, we take this case as the benchmark. Therefore, in this paper,
the environmental impact of the green product is positive, which indicates environmental improvement. The social welfare
(SW ) is given by
SW = π sc + CS + EI. (10)
Here, π sc denotes the total supply chain profit, π sc∗ = π m∗ + π p∗ . Therefore, the total supply chain profit under the three
contracts are, respectively,
1 1 9 − α2
πrssc∗ = , πasc∗ = , and πwsc∗ = .
3 − α2 4 − α2 (6 − α 2 )2
The consumer surplus is the consumers’ remnant utility, which equals the difference between the maximal acceptable sale
price and the actual sale price (Hong and Guo 2019). We denote p̂ as the maximal acceptable sale price, where p̂ = 1 +
αg∗ + e∗ . Thus, the consumer surplus is:
CS ∗ = 12 (p̂ − p∗ )D∗ .
The consumer surpluses under these three contracts are as follows:
∗ 2 32 2
CSrs = , CSa∗ = , and CSw∗ = .
(3 − α 2 )2 (16 − α 4 )2 (6 − α 2 )2
In this study, the environmental improvement under the agency contract is specified to be zero (i.e. EIa∗ = 0) and is taken
as the benchmark. Thus, the environmental improvement under the other two contracts is EIw∗ = (gw∗ − ga∗ )D∗w and EIrs∗ =
∗
(grs − ga∗ )D∗rs . We obtain the environmental improvements under the three contracts as follows:
32α − 6α 3 4α(8 − 3α 2 )
EIrs∗ = , EIa∗ = 0, and EIw∗ = .
(3 − α 2 )2 (16 − α 4 ) (6 − α 2 )2 (16 − α 4 )
Substituting the value of π sc , SC ∗ , and EI ∗ into Equation (10), the social welfare formulas under these three contracts are as
follows:
80 + α(32 − α(16 + 5α 2 − α 4 + 6α)) 1 32
SWrs∗ = , SWa∗ = + ,
(3 − α)2 (16 − α 4 ) 4 − α2 (16 − α 4 )2
176 + α(32 − α(16 + α(12 + 11α − α 3 )))
and SWw∗ = .
(6 − α)2 (16 − α 4 )
Comparing the total supply chain profit, the environmental improvements, and the social welfare results under the three
contracts, we have the following proposition:
Figure 5. Comparison of the societal impacts of the three contracts. (a) Total supply chain profit. (b) Environmental improvement. (c)
Social welfare.
Proposition 6 The total supply chain profit, the environmental improvements, and the social welfare results under the
three contracts satisfy the following relationships:
(i) πrssc∗ > πasc∗ ≥ πwsc∗ ;
(ii) EIrs∗ ≥ EIw∗ ≥ EIa∗ ;
(iii) SWrs∗ > SWa∗ > SWw∗ .
Proposition 6 reveals that, as illustrated in Figure 5, the platform-led revenue sharing contract can improve societal
impacts, producing the highest total supply chain profit, highest environmental improvement, and highest social welfare.
Compared with the wholesale price contract, the agency contract achieves higher total supply chain profit and higher
social welfare but lower environmental improvement. In addition, the social welfare differences between these contracts
(SWrsa = SWrs∗ − SWa∗ and SWrsw = SWrs∗ − SWw∗ ) increase with consumer green awareness α, which indicates that the
advantage of the platform-led revenue sharing contract in the societal impact is stronger when consumer green awareness
increases. The result can be interpreted in a manner similar to our above analysis of the property of product greenness. The
environmental improvement is lower under the agency contract than under the wholesale price contract because the product
is less green. The agency contract can provide a lower sale price to increase the consumer surplus and induce a higher mar-
keting effort to attract consumers to increase the total supply chain profit, which offsets the disadvantage of environmental
improvement. Thus, the social welfare under the agency contract is higher than that under the wholesale price contract. In
general, supply chain integration can improve supply chain performance, not only in terms of profit but also in terms of the
environment.
8. Conclusion
As consumers become more environmentally conscious and more environmentally friendly, more and more consumers
are inclined to buy products with eco-labels. In addition to self-labels and eco-labels from NGOs, some sales platforms
provide sales platform eco-labels (SPE-labels) and green marketing effort. Motivated by the higher credibility and positive
crossover effect on sales of SPE-labels, this paper develops a game-theoretic model to investigate the green product design
and marketing effort with SPE-labels in a green supply chain. Furthermore, we compare the profitability and environmental
implications of two types of contracts commonly used by sales platforms, i.e., the wholesale price contract and the agency
contract, and propose a platform-led revenue sharing contract to coordinate the green supply chain.
Previous research explored sales platforms’ strategic choice between the wholesale price contract and the agency con-
tract only from the economic perspective. This paper compares these two contracts from two perspectives: profitability and
environmental impact. We find that neither the agency contract nor the wholesale price contract can dominate in all aspects.
To be specific, on the one hand, from the perspective of profitability, the sales platform prefers the agency contract while
the manufacturer prefers the wholesale price contract. On the other hand, considering the performance of the supply chain,
the agency contract brings a higher profit while the wholesale price contract results in greater environmental improvement.
Therefore, the sales platform and the manufacturer will make different decisions under these two contracts considering the
relative influence of the SPE-label and marketing effort based on consumer green awareness. Furthermore, it is interesting
to find that when the agency contract is used and consumer green awareness increases, the sale price declines rather than
increasing as it does under the wholesale price contract. As consumer green awareness increases, the manufacturer provides
a greener product. Consequently, more consumers buy the product, which raises the total supply chain profit and social
welfare.
1500 X. Guo et al.
We also argue that neither the agency contract nor the wholesale price contract achieves decisions which are optimal for
the integrated supply chain. However, acting as the core and more powerful player of the supply chain, the sales platform
can propose a platform-led revenue sharing contract, wherein the coordinator is the sales platform rather than the traditional
manufacturer. Such a platform-led revenue sharing contract would fully coordinate the green supply chain, and improve
the supply chain performance both in profitability and in the environmental perspective. Finally, our analytical results show
that consumers’ higher green awareness is the essential factor to promote green production of the manufacturer, which can
improve the total supply chain profit and the positive environmental impact. Therefore, it is necessary and beneficial for
manufacturers or sales platforms to organise green promotion and publicity activities to raise consumer awareness of green
environmental protection.
Although we believe that our analysis has generated useful insights, there are limitations in our model that future research
can investigate further. Firstly, since we have investigated the effect of SPE-labels through analytical models, it would
also be interesting and meaningful to test the main results and the specific utility function through empirical data. We are
also to cooperate with companies to empirically test the practical application of our results, verifying the effects of the
green product design of the manufacturers and the green purchasing behaviour of consumers. Secondly, in practice, the
bargaining power of the sales platform and manufacturer under different contracts are different due to their size, assets,
and influence. Empirically investigating the economic and environmental influence of the SPE-labels on green supply chain
under practical operation contracts can provide constructive guidance for companies. For instance, in this paper, we find that
the manufacturer prefers the wholesale price contract while the sales platform prefers the agency contract. Considering the
heterogeneous bargaining power of the sales platform and the manufacturer, designing an optimal contract to improve the
performance of the supply chain can lead to practical guidance for the platform’s economic benefit. Finally, we study SPE-
labels provided by a sales platform in this paper and offer some practical guidelines to sales platforms and manufacturers.
Currently, several kinds of eco-labels coexist in the market, including manufacturers’ self-labels, eco-labels from NGOs,
and mandatory government regulation. Investigating the effects of various labelling schemes in a competitive setting may
bring meaningful managerial insights to green supply chain management. For example, which eco-label will be preferred by
manufacturers whose products have high green levels? Which eco-label is the best for manufacturers of products with low
green levels? Does the coexistence of multiple types of eco-labels affect the consumers’ trust in the green level of products?
We leave these problems for future research.
Notes
1. http://www.ecolabelindex.com/
2. Red Star Macalline hosts several ‘Green and Environmental Week’ activities in multiple cities each year, which provide consumers
with opportunities to ‘run for greenness’, visit green brand factories, and view green product testing in the lab. These activities
can enhance consumers’ awareness of green environmental protection, increase the visibility of green goods and green brands, and
stimulate the consumers’ green buying behaviour.
Acknowledgments
The authors are grateful to the associate editor and the anonymous referees for their valuable comments, constructive suggestions, and
encouragements. The quality of this article was improved substantially as a result of their precious feedbacks.
Disclosure statement
No potential conflict of interest was reported by the authors.
Funding
This work is supported by the National Natural Science Foundation of China under [grant numbers 71871207, 71520107002, 71771201
and 71921001], the Fundamental Research Funds for the Central Universities of the University of Science and Technology of China [grant
number WK2040160028], and the financial support of the USTC Research Institute of Modern Logistics Engineering.
ORCID
Xiaolong Guo http://orcid.org/0000-0002-1261-6852
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Appendix
A.1. Proof of Lemma 1
Under the agency contract, the sales platform first determines the commission rate ka . Then the manufacturer decides the product green-
ness ga and the sale price pa . After knowing the manufacturer’s decisions, the platform determines the marketing effort ea . As before,
2 p
using backward induction, we first explore how the sales platform decides the marketing effort to maximise its profit. As ∂∂eπ2a = −2 < 0,
a
p
the sales platform’s profit function πa (ea ) is concave in ea , we obtain the unique best response function of ea in reaction to ka , wa , and
p
ga through the first-order condition dπa /dea = −2ea + ka pa = 0.
ka pa
e∗a (ka , wa , ga ) = .
2
Knowing the commission rate ka , the manufacturer decides the product greenness
∂ 2 π m ∂ 2 πgm a and the sale price pa to maximise its profit. The Hes-
2a a
a ∂ga ∂pa −2 α(1−ka )
sian matrix of the manufacturer’s profit function is negative definite: ∂∂g = α(1−ka ) −(1−ka )(2−ka ) = (1 − ka )((1 − ka )(1 −
∂p ∂ga ∂ π2a
2πm 2 m
a a ∂pa
α 2 ) + (3 − ka )) > 0. Therefore, the profit function of the manufacturer πam (pa , ga ) is jointly concave in (pa ,ga ). We can get the unique
optimal solution pair (p∗a , ga∗ ) as follows:
2 α − αka
p∗a (ka ) = , ga∗ (ka ) = .
4 − 2ka − (1 − ka )α 2 4 − 2ka − (1 − ka )α 2
Finally, the sales platform determines the commission rate ka to maximise its profit. By substituting the best response function of
p∗a (ka ), ga∗ (ka ) into Equation (5), the profit function of the sales platform πa (ka ) is concave in ka . We can get the unique optimal solution
p
ka∗ as follows:
8
ka∗ = 2 − .
8 − α2
∗ ∗ ∗ ∗
Substituting ka into pa (ka ), ga (ka ), and ea (ka , wa , ga ), we get the optimal solutions under the agency contract as follows:
8 α3 2(8 − α 2 ) 2
ka∗ = 2 − , ga∗ = , p∗a = , e∗a = .
8 − α2 16 − α 4 16 − α 4 4 + α2
A.2. Proof of Proposition 1

We can obtain the market demand, the profit of the manufacturer, the profit of the sales platform, and the total profit of the supply chain
under the agency contract as follows:
8 4 α2 1
D∗a =
p∗
, πa = , πam∗ = , πasc∗ = .
16 − α 4 16 − α 4 16 − α 4 4 − α2
dka∗ dga∗ α 2 (α 4 +48) dp∗a 4α(α 4 −16α 2 +16) de∗a dD∗a
Therefore, we can get: dα = − (8−α
16α
2 )2 < 0, dα = (16−α 4 )2 > 0, dα = − (16−α 4 )2
< 0, dα = − (α 24α
+4)2
< 0, dα =
p∗
32α 3 dπa 16α 3 dπam∗ 2α(α 4 +16) dπasc∗
(16−α 4 )2
> 0, dα = (16−α 4 )2
> 0, dα = (16−α 4 )2
> 0, dα = (4−α2 )2 > 0.
2α

Under the traditional wholesale price contract, the manufacturer, as the leader, decides the product greenness gw and wholesale price ww to
maximise its profit. The sales platform, as the follower, decides the sale price pw and the marketing effort ew to maximise its own profit.
Using backward induction, we first investigate the decision problem of the sales platform. The Hessian matrix of the sales platform’s
∂ 2 π2wp ∂ 2 πwp
∂pw ∂ew
profit function is negative definite: ∂∂p2 πwp ∂ 2 π p = −2 1 p
−2 = 3 > 0. Since πw (pw , ew ) is jointly concave in (pw ,ew ) in Equation (6),
∂e ∂p w
2
w 1
w w ∂ew
we obtain the unique best response function of (p∗w ,e∗w ) in reaction to ww and gw through the first-order condition dπw /dpw = 1 + ew −
p
p
2pw + ww + αgw = 0, dπw /dew = −2ew + pw − ww = 0.
p∗w (ww , gw ) = 13 (2 + ww + 2αgw ), e∗w (ww , gw ) = 13 (1 − ww + αgw ).
The manufacturer, acting as the supply chain leader, decides the product greenness and the wholesale price, and pays for the green cost. By
substituting the best response functions of p∗w (ww , gw ), e∗w (ww , gw ) into Equation (7), we solve the decision problem of the manufacturer.
∂2πm ∂2πm
2w w
w ∂gw ∂ww −2 2α3 4(6−α 2 )
The Hessian matrix of the manufacturer’s profit function is negative definite: ∂∂g = 3 −3 = > 0. Thus, the profit
2πm
w ∂ πw
2 m 2α 4 9
∂ww ∂gw ∂w2
w
of the manufacturer πwm (ww , gw ) is jointly concave in (ww ,gw ). We can get the unique optimal solution pair (w∗w , gw∗ ) as follows:
3 α
w∗w = , gw∗ = .
6 − α2 6 − α2
∗ ∗ ∗ ∗
Substituting ww and gw into pw (ww , gw ) and ew (ww , gw ), we get the optimal solutions under the wholesale price contract as follows:
3 α 5 α
w∗w = , gw∗ = , p∗w = , e∗w = .
6−α 2 6−α 2 6−α 2 6 − α2

We can obtain the market demand, profit of the manufacturer, profit of the sales platform, and total profit of the supply chain under the
wholesale price contract as follows:
2 3 1 9 − α2
D∗w =
p∗ p∗
, πw = , πwm∗ = , πwsc∗ = πwm∗ + πw = .
6 − α2 (6 − α 2 )2 6 − α2 (6 − α 2 )2
dw∗w dg∗ α 2 +6 dp∗w de∗w dD∗w p∗
dπw
Using these, we can get: dα = 6α
(6−α 2 )2
> 0, dαw = (6−α 2 )2 > 0, dα = 10α
(6−α 2 )2
> 0, dα = 2α
(6−α 2 )2
> 0, dα = 4α
(6−α 2 )2
> 0, dα =
dπwm∗ dπ sc∗ 2
)
12α
(6−α 2 )3
> 0, dα = 2α
(6−α 2 )2
> 0, dαw = 2α(12−α(6−α )
2 3 > 0.
1504 X. Guo et al.

2α(8−3α ) 2
2(α 4 −4α 2 +8)
Based on Lemmas 1 and 2, we can get: ga∗ − gw∗ = − (6−α ∗ ∗ , D∗a − D∗w =
8−3α 2 p∗
2 )(16−α 4 ) < 0, ea − ew = (4+α 2 )(6−α 2 ) (6−α 2 )(16−α 4 )
> 0, πa −
p∗ 7α −48α +96
4 2 2(8−3α ) 2
α 2
πw = (6−α 2 )2 (16−α 4 )
> 0, πam∗ − πwm∗ = − (6−α 2 )(16−α 4 ) < 0, πa
sc∗ − π sc∗ =
w (6−α 2 )2 (4−α 2 )
≥ 0.

7α 4 −28α 2 +16
. As d(7α −28α +16)
4 2
For the sale price, p∗a − p∗w = (6−α 2 )(16−α 4 ) dα = −28α(2 − α 2 ) < 0, there is a threshold α ∗ = 2−2 3
7, when
0≤α≤ α∗ , 7α 4 − 28α 2 + 16 > 0, that is, p∗a − p∗w > 0; otherwise, when α ∗ < α ≤ 1, we have 7α 4 − 28α 2 + 16 < 0, that is, p∗a −
p∗w < 0.

Under the centralised system, the product greenness gc , sale price pc , and marketing effort ec need to be determined ∂ 2 π scto ∂maximise the
c 2 πcsc ∂ 2 πcsc
∂gc2 ∂gc ∂pc ∂gc ∂ec
2 sc 2 sc 2 sc
total supply chain profit. The Hessian matrix of the total profit function of the supply chain is negative definite: ∂p∂ cπ∂gc c ∂ ∂pπ2c ∂p∂ cπ∂ec c =
∂ 2 πcsc ∂ 2 πccsc ∂ 2 πcsc
∂ec ∂gc ∂ec ∂pc
∂e2c
−2 α 0
α −2 1 . This means that the total profit function of the supply chain π sc (gc , pc , ec ) is jointly concave in (gc , pc , ec ). We can get the
0
1 −2
c
unique optimal solution (gc∗ , p∗c , e∗c ) as follows:
α 2 1
gc∗ = , p∗c = , e∗c = .
3 − α2 3 − α2 3 − α2

We propose the platform-led revenue sharing contract to coordinate the supply chain. As the leader, the sales platform designs a contract
specifying the commission rate and marketing effort as follows:
(1 − φ)grs2 φe∗rs
krs = 1 − φ − + ,
prs Drs prs Drs
1
e∗rs = .
3 − α2
Substituting the coordination contract into the manufacturer’s profit function Equation (9), we can get πrs m = φ(p D − g2 − e∗2 ) =
rs rs rs rs
φπrs
sc . That is, the manufacturer’s objective function is consistent with the objective function of supply chain coordination. The profit
function of the manufacturer πrsm (g , p ) is jointly concave in (g , p ), so we can get the unique optimal solution (g∗ , p∗ ) as follows:
rs rs rs rs rs rs
∗ α 2
grs = , p∗rs = .
3 − α2 3 − α2
Therefore, the supply chain is fully coordinated by the specified platform-led revenue sharing contract.

Based on Lemmas 1–3, the proof of Proposition 5 is similar to that of Proposition 3. We omit the details.

Considering the societal impact, we compare the total supply chain profit, environmental improvement, and social welfare of the three
α2
contracts. First, from the perspective of the total supply chain profit, πrs
sc∗ − π sc∗ =
a
1
(3−α 2 )(4−α 2 )
> 0, πasc∗ − πwsc∗ = (4−α2 )(6−α 2 )2 ≥ 0.
∗ − EI ∗ = 6α(α 6 −50α 2 +144) 4α(8−3α 2 )

From the perspective of environmental improvement, EIrs w (16−α 4 )(α 4 −9α 2 +18)2
> 0, EIw∗ − EIa∗ = (6−α 2 )2 (16−α 4 ) > 0.
∗ ∗ 2(α 8 −48α 4 +96α 2 +112) ∗ ∗ 2(−α 8 +48α 4 −192α 2 +320)

From the perspective of consumer surplus, CSrs − CSa = (3−α2 )2 (16−α 4 )2 > 0, CSa − CSw = (6−α 2 )2 (16−α 4 )2
> 0.
From the perspective of social welfare, as πrs sc∗ > π a∗ , CS ∗ > CS ∗ , EI ∗ > EI ∗ , hence we get SW ∗ > SW ∗ and SW ∗ − SW ∗ =
rs rs a rs a rs a a w
−3α 8 −12α 7 −4α 6 +32α 5 +112α 4 +192α 3 −320α 2 −512α+640
(α 6 −6α 4 −16α 2 +96)2
> 0.

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International Journal of Production Research

ISSN: 0020-7543 (Print) 1366-588X (Online) Journal homepage: https://www.tandfonline.com/loi/tprs20

Green supply chain contracts with eco-labels

Xiaolong Guo, Lihong Cheng & Jie Liu

To link to this article: https://doi.org/10.1080/00207543.2019.1658911

Published online: 28 Aug 2019.

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2.1. Operational decisions of green supply chain

2.2. Value of different eco-label schemes

2.3. Contract structure of sales platform

Table 1. Summary of relevant literature.

u = g(v − p + α + e) + (1 − g)(v − p + e) = v − p + αg + e. (1)

5.1. Agency contract

Figure 1. Sequence of events under the agency contract.

5.2. Wholesale price contract

Figure 2. Sequence of events under the wholesale price contract.

p∗w (ww , gw ) = 13 (2 + ww + 2αgw ), e∗w (ww , gw ) = 13 (1 − ww + αgw ).

max πwm (ww , gw ) = ww (1 − pw + αgw + ew ) − gw2 . (7)

5.3. Agency contract vs. wholesale price contract

6. Full supply chain coordination

Figure 3. Revenue proportion of the manufacturer.

As shown in Figure 3, since α 16−α

A.2. Proof of Proposition 1

A.3. Proof of Lemma 2

A.4. Proof of Proposition 2

A.5. Proof of Proposition 3

A.6. Proof of Lemma 3

A.7. Proof of Proposition 4

A.8. Proof of Proposition 5

A.9. Proof of Proposition 6

∗ − EI ∗ = 6α(α 6 −50α 2 +144) 4α(8−3α 2 )

∗ ∗ 2(α 8 −48α 4 +96α 2 +112) ∗ ∗ 2(−α 8 +48α 4 −192α 2 +320)

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