Fairness in Selling to the Newsvendor

Abstract:     
This paper studies the impact of fairness concerns on supply chain performance in the two-party newsvendor setting. We not only extend prior fairness analysis to a wide range of demand distributions, but also allow the degree and definition of fairness to assume a broader range of preferences than those in prior literature. Contrary to prior literature, we find that with low demand uncertainty a fair-minded retailer makes no difference to system efficiency when facing a traditional supplier. Only when the demand uncertainty is sufficiently high can the retailer’s fairness concern improve the expected profits of both parties compared to the traditional supply chain case (win-win), and this is limited to cases when the retailer’s definition of a fair allocation is within a specific range and he is strongly averse to advantageous inequity. If only the supplier is concerned for fairness, the results range from worsening to improving (but not coordinating) the system and a win-win situation is impossible. Finally, when both the supplier and retailer are moderately fair-minded, the supply chain performance is likely to be improved for all levels of demand uncertainty unless the supplier is strongly disadvantage averse and the sum of the allocations that each party desires exceeds 100% of total profit. However, both firms obtain a larger profit compared to the traditional case (win-win) only in the case where demand uncertainty is sufficiently high, the retailer’s fair allocation is within a certain range and he is sufficiently averse to advantageous inequity. For purely competitive or social welfare preferences, the worst effect on the overall chain is found when both hold competitive preference, but the best case occurs when a social-welfare-minded supplier faces a purely competitive retailer.

Number of Pages in PDF File: 39

Keywords: Fairness, inventory, utility, newsvendor, newsvender, behavior, wholesale

working papers series