Abstract: A two-tier supply chain structure composed of a upstream manufacturer with environmental concern and a downstream processing plant is considered. The manufacturer produces the prime product and generates valuable wastes. The plant may produce the by-product based on the wastes (material) from the manufacturer. Based on different bargaining powers in the supply chain, the by-product synergy production mode is investigated, in which the manufacturer sells wastes to the plant and the plant converts the wastes into a new by-product. The manufacturer's optimal production decision is derived, the optimal trading price of wastes (between manufacturer and the plant) and the manufacturer's optimal waste-disposal strategy. The results show that by-product synergy production is not always better for manufacturer, which is determined by the customer's quantity sensitivity to the by-product. When this sensitivity is high, the manufacturer is more prone to disposing wastes by himself. However, if the customer is less sensitive, the manufacturer will choose the by-product synergy strategy. Meanwhile, as the increase of the manufacturer's bargaining power, the manufacturer's equilibrium profit increases and the plant's profit decreases, respectively. Finally,it is verified that our main results are still robust in random yield scenario.

Key words: bargaining power, by-product synergy, quantity decision