The Value and Pitfall of CM's Sustainability Signal Considering OEM's Greenwash

It is widely observed in industry that some firms intentionally “greenwash” their products to profit from the ever-rising green consumerism; however, there are also some firms that unintentionally greenwash as a result of misinformation, a form of supplier responsibility risk. To manage this risk, the most common approach is asking for samples before the products are delivered at scale. In this article, we consider a contract manufacturer (CM) that supplies products to an original equipment manufacturer (OEM). The CM has the option to implement a green product line. Before conveying a sustainability message to consumers, we assume that the OEM can choose whether or not to ask for samples and update its belief about the final product type. We start with a base case where the CM does not sell self-branded products. In this situation, the CM always sends an authentic signal and the OEM conducts deliberate greenwash only when the risk of detection is low. However, after extending the base case to a co-opetition case, where the CM not only makes profit from its contract manufacturing business, but also sells self-branded products, the strategic interactions of the OEM and CM become more intriguing. We find the OEM may deliberately greenwash even if it is highly risky, in order to lower the wholesale price, and the CM may send nongreen samples even if a green product line is setup. More interestingly, we find the misleading signal is able to mitigate the double marginalization effect (the double markup in price) by decreasing the wholesale price and the market price of products simultaneously, and this increases consumer surplus, but may lead to higher environmental impact. This work has implications for both operations managers and regulators. We suggest managers in OEMs ask for samples before a CM delivers products at scale if the market potential is high and the CM encroaches on end market. Regulators should note that penalties alone may not curb greenwash, as an OEM may use it for strategic purpose.