Product line extension with a green added product: Impacts of segmented consumer preference on supply chain improvement and consumer surplus

Abstract

With the enhancement of environmental protection, more and more enterprises begin to develop green products. However, the high cost of green R&D leads to an increase of product price, which reduces the competitiveness of green products. In this paper, we model a supply chain which consists of one manufacturer and one retailer providing a primary product and a substitutable green added product in the market. In order to capture the impact of consumer behavior on the supply chain members' decision-making, we classify the market into two segments and assume that high-end green consumers have higher preferences for green products than ordinary consumers. Different to existing research, we assume ordinary consumers hold a positive but lower green preference compared to the green consumers. When analyzing the impacts of consumers' green preferences, we find that there exist specific boundaries of cost and market potential which define the optimal pricing strategy and product line design. Regarding profits, we find that when the green preferences of high-end and low-end consumers increase in the same proportion, the high-end market may not bring greater supply chain revenue. In particular, the marginal profit increase of the manufacturer is always greater than that of the retailer.