Fairness and Competition in Supply Chains

Abstract

In supply chain transactions, members care about how profit is distributed as well as their own payoff. Retailers prefer more equitable outcomes when they compare their profit with the supplier's profit. While existing research focuses on fairness in the vertical competition between an upstream supplier and a downstream retailer, this paper studies the impacts of fairness when a retailer is engaged in vertical competition with the supplier and simultaneously in horizontal competition with other retailers. We consider a setting where a supplier sells differentiable products through two retailers who compete either on sales quantity or on retail price. We analyze the influence of fairness on the behavior and performance of the supply chain members. We characterize and compare equilibrium solutions in different competition situations. Our analysis identifies circumstances where fairness may influence the economic outcomes for the fair-minded, the profit-maximizing retailers, and the supplier for either better or worse. More importantly, we find that the presence of horizontal competition can reverse the impact of fairness.

Keywords: Fairness, Supply Chain Contracting, Behavioral Operations Management, Quantity Competition, Price Competition, Product Differentiation