Fairness in Selling to the Newsvendor

Abstract

TThis paper studies the impact of fairness concerns on supply chain performance (SCP) in the two-party newsvendor setting. We extend prior fairness analysis to a wide range of demand distributions, and 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 if the retailer’s ideal allocation to the supplier is not sufficiently large, regardless of demand variability, a fair-minded retailer makes no difference to system efficiency when facing a traditional profit-maximizing supplier. Only when the retailer’s ideal allocation to the supplier is above a threshold can the retailer’s fairness concern improve the system efficiency for sufficiently high demand uncertainty. In order for the retailer’s fairness concern to improve expected profits of both parties compared to the traditional supply chain case (win-win), the demand uncertainty cannot be too low, the retailer is not very averse to disadvantageous inequity, and his ideal allocation to the supplier is within a specific range. 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 fair-minded, SCP is improved unless both parties prefer to allocate small portions of system profit to the other. Again, win-win will be achieved only when the demand uncertainty is sufficiently high, the retailer’s ideal allocation is within a certain range, and he is not very averse to disadvantageous inequity.

Keywords: Supply Chain Management, Modeling Behavioral Preferences, Incentives and Contracts