Fairness Ideals in Distribution Channels
Tony Haitao Cui
University of Minnesota - Twin Cities
University of Wisconsin - Madison - Department of Marketing
March 5, 2012
Existing research suggests that concerns for fairness may significantly affect the interactions between firms in a distribution channel. We analytically and experimentally evaluate how firms make decisions in a two-stage dyadic channel, in which firms decide on investments in the first stage and then on prices in the second stage. We find that firms’ behaviors differ significantly from the predictions of the standard economic model.
We explain the results by allowing the retailer to concern distributive fairness with the manufacturer. Using a Quantal Response Equilibrium (QRE) model, in which both the manufacturer and retailer make noisy best responses, we show significant concerns exist regarding fairness between channel members. Additionally, we propose a new principle of distributive fairnessthe sequence-aligned ideal, that is studied first time in literature, and compare the new fairness ideal with several existing ideals in literature. Surprisingly, the new ideal, according to which the sequence of moving determines the formation of equitable payoff for players, significantly outperforms other fairness ideals, including strict egalitarianism, liberal egalitarianism, and libertarianism.
Number of Pages in PDF File: 43
Keywords: fairness ideals, distribution channels, quantal response equilibrium, experimental economics
JEL Classification: C72, D63
Date posted: March 14, 2012