Distributional and Peer-Induced Fairness in Supply Chain Contract Design

Abstract

Members of a supply chain often make profit comparisons. A retailer exhibits peer-induced fairness concerns when his own profit is behind that of a peer retailer interacting with the same supplier. In addition, a retailer exhibits distributional fairness concerns when his supplier's share of total profit is disproportionately larger than his own. While existing research focuses exclusively on distributional fairness concerns, this paper investigates how both types of fairness concerns might interact and influence economic outcomes in a supply chain. We consider a setting where a supplier sells an identical product through 2 independent retailers, each serving his own market. The supplier sequentially offers each retailer a linear wholesale price contract, and each retailer must choose his own retail price if he accepts the supplier's wholesale price offer. The second retailer observes a noisy signal of the first wholesale price offer and this information may influence his decisions. We show that: (i) the first wholesale price offer is lower than the standard wholesale price offer in the absence of fairness concerns, (ii) the second wholesale price is higher than the first wholesale price, and (iii) the second retailer makes a lower profit and has a lower share of the total supply chain profit than the first retailer. We run controlled experiments with subjects motivated by substantial monetary incentives and show that subject behaviors are consistent with the model predictions. Structural estimation on the data suggests that peer-induced fairness is more salient than distributional fairness.

Keywords: Distributional Fairness, Peer-induced Fairness, Supply Chain Contracting, Behavioral Operations Management, Behavioral Economics