1. Introduction
With the new generation of information technologies represented by big data and artificial intelligence being applied in many fields of social life, the digital economy and e-commerce of countries worldwide have been greatly developed. The China E-commerce Report (2021) revealed that the national e-commerce transaction volume may reach ¥42.3 trillion RMB in 2021, with a year-on-year growth of 19.6% [
1]. According to the Digital China Development Report (2022), the scale of China’s digital economy reached ¥50.2 trillion RMB in 2022, ranking second in the world, with a year-on-year nominal growth of 10.3% [
2]. With an increasing focus on environmental protection by people and organizations in societies worldwide, an increasing number of customers want to buy green products in e-business [
3,
4]. To fulfill customers’ green preferences, drop shipping e-tailers should purchase green products from suppliers who produce green products with a drop shipping option. In other words, the supplier with a drop shipping option should spend more resources to innovate its production of green products compared to normal ones, which would subsequently increase the cost of manufacturing these green products and the wholesale price. In this scenario, the supplier with a drop shipping option should decide whether to provide green products or sell normal products. When the supplier with a drop shipping option supplies green products at a higher wholesale price than normal products to the drop shipping e-tailer, the latter should also determine whether to provide green products at a high retail price or to supply normal products at a low retail price, because the increase in the retail price of physical goods will reduce the number of customer demand. This study proposes two operational scenarios for drop shipping e-tailers and suppliers with a drop shipping option based on traditional models [
5], and each operational scenario has two models, which are the model of drop shipping e-tailer and the model of the supplier with a drop shipping option. The first scenario involves a drop shipping e-tailer selling normal products, and the second scenario involves a drop shipping e-tailer providing green products. Furthermore, this study expands the green innovation of the e-tailer and supplier from traditional models to drop shipping models, and the optimal decisions of the drop shipping e-tailers and suppliers with a drop shipping option across different operational environments are also evaluated.
The Global Digital Economy White Paper released at the 2023 Global Digital Economy Conference indicates that the scale of China’s digital economy will increase by
$4.1 trillion dollars in 2022, with a compound annual growth rate of 14.2% [
6]. Against the backdrop of a booming digital economy, China’s e-commerce has also exhibited a thriving and prosperous scene. The concept of the digital economy was first proposed by Tapscott in 1995, and he believed that an important feature of the digital economy is networked intelligence [
7]. In 1998, Tapscott, Lowy, and Ticoll et al. wrote a blueprint for the digital economy and believed that the era of e-business was coming and would bring more wealth to society [
8]. Carlsson then evaluated the reasons why the digital economy is called the new economy of the United States economy in the latter half of the 1990s and observed changes in the view that digitization of information, combined with the Internet, etc. [
9]. Peitz and Waldfogel provided a series of theoretical and empirical works on the digital economy, including the digital industry and business practices [
10]. Although green development has been accepted in many countries worldwide, Liu, Liu, and Osmani agreed that digital technology has powerful potential to promote the development of a circular economy and reviewed the research progress and trends of the integration of the circular economy and digital economy [
11]. Rusch, Schoggl, and Baumgartner considered digital technologies to act as enablers for a more sustainable and circular economy and offered a comprehensive overview of current and potential examples of digital technology applications in different models through quantitative and qualitative content analysis [
12]. In general, with more than decades of continuous research on the digital economy and green development by many scholars and experts, fruitful results have valuable positive significance for the sustainable development of the world economy and natural environment.
Drop Shipping was initially used by mail-order companies as a marketing method in the 1990s, achieving great success after they were introduced into e-commerce and obtaining a win-win model of sharing customer information and e-fulfillment capabilities between the e-tailers and suppliers [
13]. The world’s largest luggage e-tailer, eBags, uses drop shipping to sell over 12,000 kinds of goods with more than 200 brands. Many e-tailers in Taobao, eBay, and Amazon chose drop shipping to complete their customer orders. Lee and Chu examined the variation in the e-tailer’s profit in traditional VMI, CAM, and drop shipping modes based on the Newsvendor Model [
14]. Bailey and Ravinovich believed that e-tailers should mix traditional channels and drop shipping modes in most operational environments, which can improve product sales [
15]. Mukhopadhyay, Zhu, and Yue analyzed the optimal decision making issues of manufacturers using mixed-channel models [
16]. Xiao, Chen, and Chen evaluated the optimal inventory and ordering decisions of an e-tailer in hybrid channels who utilized an Internet store and physical shop to provide seasonal commodities for customer demand from online and offline channels [
17]. Chiang and Feng investigated corporate issues between the manufacturer and the e-tailer with traditional distribution channels and drop shipping channels and analyzed the profit rate and efficiency of these two channels [
18]. Zhao, Duan, and Wang et al. focused on the coordination mechanism and pricing issues of a dual-channel supply chain with a drop shipping option [
19]. In recent years, with the gradual increase in emerging information technologies such as big data in e-commerce and other related fields [
20], research on e-tailers has attracted the attention of many experts and scholars worldwide. In 2018, Chen, Chiu, and Lin et al. proposed online product arrangement and stock management problems for an e-tailer in a drop shipping environment [
21]. Sodero, Namin, and Gauri et al. used analytical models to examine the inventory assortment operation of an e-tailer who provided seasonal products to the market with both drop shipping and store channels [
22]. Qiu, Hou, and Sun et al. analyzed the decision issues of a dual-channel supply chain that contained a manufacturer, a traditional retailer, and an e-tailer and obtained analytical solutions for pricing and ordering decisions with uncertain demands through a distribution-free approach [
23]. These findings indicate that e-commerce has become an important growth point in the social economy and a new driving force for promoting economic growth, but there is rarely research on the green innovation of the drop shipping e-tailer and supplier in e-commerce, the traditional e-tailer and supplier obtained more margins from green products in traditional models [
5], what will happen when the drop shipping e-tailer and the supplier with a drop shipping option begin to make green innovation and provide green goods? How will the operational parameters influence the drop shipping e-tailer and the supplier with a drop shipping option when they pay additional resources for the green innovation of normal products? It is just the motivation of this study. With the vigorous development of e-commerce activities worldwide, particularly the rise of cross-border e-commerce, various business model innovations will continue to emerge in the real economy.
The remainder of this paper is organized as follows: The notations and operational models of the drop shipping e-tailers and suppliers with a drop shipping option are investigated in
Section 2, and this section analyzes the margins they gained from selling normal and green products to customers.
Section 3 evaluates the optimal choices and decisions of drop shipping e-tailers and suppliers with a drop shipping option for offering normal and green commodities. The effect of environmental parameters on drop shipping e-tailers and suppliers with a drop shipping option in different operational scenarios is illustrated through simulation analysis in
Section 4.
Section 5 concludes.
2. Models of the Drop Shipping E-Tailers and Suppliers
In drop shipping models, the customer demands in the market are computed using Equations (1) and (2) [
5,
24], where
is the customer demand for normal products and
is the customer demand for green ones. The notations used in this study and their descriptions are presented in
Table 1.
When providing green products to the drop shipping e-tailers, the suppliers with a drop shipping option must pay a certain amount of additional cost to the green innovation of normal products to gain green products. This additional cost is computed as
[
24,
25].
2.1. Drop Shipping Models with Normal Products
E-tailers do not have a private inventory system in the drop shipping models. When customers on the Internet purchase normal goods from the drop shipping e-tailer, the latter receives the order information from the customers and then transfers this information to the supplier with a drop shipping option; the supplier delivers these physical products to customers directly according to the received order information. Drop shipping e-tailers differ from traditional e-tailers in three ways. First, traditional e-tailers operate an inventory system, whereas drop shipping e-tailers have no such system. Second, traditional e-tailers send their physical products to customers and pay the distribution cost, whereas drop shipping e-tailers do not charge any distribution cost and let the suppliers with a drop shipping option finish the distribution process. Third, e-fulfillment is accomplished by the traditional e-tailers themselves with their inventory stocks, whereas the drop shipping e-tailers fully depend on the suppliers with a drop shipping option to complete the e-fulfillment process. For the suppliers, the biggest change is the newly added distribution cost in drop shipping models compared with traditional models, and it will cause an increase in the wholesale price of physical goods.
For the sake of generality in
Table 1, there are assumptions that include
,
,
and
to ensure that both drop shipping e-tailers and suppliers with a drop shipping option can earn profits.
In the operational process, where the drop shipping e-tailer and supplier with a drop shipping option provide normal commodities on the Internet, the supplier with a drop shipping option first decides the wholesale price of normal products and ensures that , and then the drop shipping e-tailer sets a proper value for the retail price of normal products. The supplier with a drop shipping option spends resources on manufacturing normal products and delivers these goods to customers based on the distribution requests of the drop shipping e-tailer. To create margins, the wholesale price of normal products should exceed the sum of these costs, and it is set by the supplier with a drop shipping option. Meanwhile, the drop shipping e-tailer sells normal products to customers and sets an appropriate retail price before customers begin purchasing these goods. In the e-fulfillment operation, given that the supplier with a drop shipping option bears the cost of distributing physical products to customers, the retail price of normal products as determined by the drop shipping e-tailer should be higher than the wholesale price decided by the supplier with a drop shipping option.
In general, the wholesale and retail prices of normal products are decided by the supplier with a drop shipping option and drop shipping e-tailer, respectively. The supplier with a drop shipping option spends a certain amount of fees on manufacturing physical products, delivers physical products to end customers according to the order information received from the drop shipping e-tailer, and supplies commodities to the drop shipping e-tailer at the wholesale price. Whereas, the drop shipping e-tailer provides product information to customers, gathers their order information over the Internet and sends order information to the supplier with a drop shipping option for the distribution service.
If the supplier with a drop shipping option and drop shipping e-tailer offers normal products to the market, the unit margin of the drop shipping e-tailer for providing normal products is obtained by subtracting the wholesale price from the retail price of normal goods, whereas its total income is obtained by multiplying the amount of customer demand
by the unit revenue. Meanwhile, the unit profit of the supplier with a drop shipping option for offering normal commodities is computed as the wholesale price minus the manufacturing and distribution costs of normal products, and its total income is obtained by multiplying the sum of customer demand
for normal products on the Internet by unit revenue. Then, the profits of the drop shipping e-tailer and supplier with a drop shipping option are computed using Equations (3) and (4), respectively.
2.2. Drop Shipping Models with Green Products
Based on the operational environment of the green drop shipping e-tailer and green supplier with a drop shipping option, the physical goods stored in the inventory systems of the latter are all green products in drop shipping models, and the operational steps in e-fulfillment are the same as those for the normal products. The green supplier with a drop shipping option is responsible for manufacturing green goods for the drop shipping e-tailer and distributing these green goods to customers. Meanwhile, the green drop shipping e-tailer must transfer information about green products to customers and send order information to the green supplier with a drop shipping option. In the process of manufacturing green products, the green supplier with a drop shipping option should charge additional fees to perform the green innovation of green products. Therefore, for the green supplier with a drop shipping option, the fees for manufacturing green products are higher than those for producing normal products.
In this operational model with green products, the supplier with a drop shipping option initially determines both the wholesale price
and green degree
of green products, and the drop shipping e-tailer decides the retail price
of green products after the supplier with a drop shipping option making decisions. After customers order green products from the green drop shipping e-tailer over the Internet, the latter sends such order information to the green supplier with a drop shipping option responsible for distributing green physical products to customers. Customers buy green products from the green drop shipping e-tailer at a retail price determined by the latter, and the green supplier with a drop shipping option delivers these products directly to customers. Given the additional costs involved in green innovation and the drop shipping service of green products, the green supplier with a drop shipping option sells these products to the green drop shipping e-tailer at a higher wholesale price than that of normal products, whereas the customer demand of green products
is greater than that of normal goods
because of their green preferences, and the increase in customer demand can bring more margins for the drop shipping e-tailer and supplier with a drop shipping option and partly reduce the adverse impact of increased green innovation costs. The profits of the green drop shipping e-tailer and green supplier with a drop shipping option can be obtained using Equations (5) and (6), respectively.
5. Conclusions
When an increasing number of people start to order commodities and services on the Internet and continuously focus on green development and environmental protection in digital economics, this study has the following conclusions: (1) The wholesale price of green products set by the green supplier with a drop shipping option is higher than that of normal products in the drop shipping models. (2) The retail price of green products determined by the green drop shipping e-tailer is also higher than that of normal products. (3) Both the drop shipping e-tailers and suppliers with a drop shipping option should provide green products to customers given the higher margins compared with selling normal ones, so green innovation has a positive impact on the e-tailer and supplier in drop shipping models, and the above three conclusions are obtained from Theorem 1 to Theorem 5. (4) The green elasticity coefficient has a positive relationship with the green degree of green products, but the green innovation factor, manufacturing cost, and distribution cost have a negative relationship with the green degree of green products. (5) The green elasticity coefficient, manufacturing cost, and distribution cost have a positive impact on the wholesale and retail prices of green products, and the green innovation factor has a harmful impact on the wholesale and retail prices of green products. (6) The green elasticity coefficient has a positive influence on the margins of the drop shipping e-tailer and supplier with a drop shipping option, but manufacturing cost, distribution cost, and green innovation factor have a negative influence on the margins of the drop shipping e-tailer and supplier with a drop shipping option, and these last three conclusions are obtained by computer simulation.
The following theoretical implications were obtained: (1) This study extends the optimal choices and decision issues of the e-tailers and suppliers from traditional models to the drop shipping models and obtains their optimal decision variables in two different operational scenarios, especially the optimal green degree of green products decided by the green supplier with a drop shipping option. (2) This research analyzes the impact of environmental parameters on the green degree of green products in drop shipping models through computer simulation. (3) This study evaluates the influences of operational factors on the drop shipping e-tailers and suppliers with a drop shipping option in drop shipping models.
The management implications of this study are as follows: (1) Green suppliers with a drop shipping option should set a higher wholesale price for green products than normal goods to earn more margins. (2) In order to maximize profits, Green drop shipping e-tailers could also decide on a higher retail price of green goods than normal ones in practice. (3) Although the wholesale and retail prices of green products are higher than those of normal products, both drop shipping e-tailers and suppliers with a drop shipping option can earn more margins from investing additional resources to produce green products because consumers willingly purchase these products despite their higher retail prices. (4) In order to increase the green degree of green products, the drop shipping e-tailer and the supplier with a drop shipping option should take action to raise the green elasticity coefficient and decrease the green innovation factor, manufacturing cost, and distribution cost. (5) With the aim to decrease the wholesale and retail prices of green products, the drop shipping e-tailer and the supplier with a drop shipping option should try their best to obtain an environment with a lower green elasticity coefficient, manufacturing cost, and distribution cost, and a higher green innovation factor. (6) In order to earn more margins, the drop shipping e-tailer and the supplier with a drop shipping option should run their business in an operational scenario with a high level of Green elasticity coefficient and low level of manufacturing cost, distribution cost, and green innovation factor.
Although this study has obtained some valuable results, it also has some limitations, which provide extends for future research; for example, the analytical models proposed in the research are theoretical drop shipping models, and they would show the basic operations and phenomenon of the drop shipping e-tailer and the supplier with a drop shipping option, other complex models and hybrid models should be evaluated. In addition, the experimental results are concluded from computer simulation in this research, especially the influences of environmental variables on the drop shipping e-tailer and the supplier with a drop shipping option, so the empirical study on the green innovation of the drop shipping e-tailer and the supplier with a drop shipping option in other complex models is also important. These findings are valuable for drop shipping e-tailers and suppliers with a drop shipping option for providing green commodities, especially when formulating tactical decisions in the digital economic era.