# American Institute of Mathematical Sciences

July  2017, 13(3): 1347-1364. doi: 10.3934/jimo.2016076

## Fairness and retailer-led supply chain coordination under two different degrees of trust

 1 Applied Economics Postdoctoral Research Station, Business School, Guangxi University, Nanning, Guangxi, 530004, China 2 School of Economics and Business Administration, Chongqing University, Chongqing 400030, China

* Corresponding author

Received  September 2014 Revised  August 2016 Published  October 2016

Fund Project: The authors are partially supported by NSF grant 71571024 and the humanities and social sciences research program of the Ministry of Education (15YJA630058, 14YJA630087). The first author is partially supported by Guangxi Postdoctoral Special Funding Project

Nowadays, customers are the decisive part in the market. The retailers who are closest to final consumers in a supply chain begin to show their power and thereby dominate the supply chain. Thus, the research about a retailer-led supply chain continues to be a burning question in the recent trade press and academic literature. Our research adds fresh fuel to the fire by studying how one channel member' fairness concern affects the coordination of a two-stage supply chain with a dominant retailer and a supplier. We carry out our investigation in two cases which involve different degrees of trust between the channel members about the unit cost $c$ provided by the supplier. Our analysis shows that if the channel members have the same degree of trust on $c$-value, the dominant retailer can use a constant markup pricing contract to align the fair-minded supplier's interest with the channel's and coordinate the channel with a wholesale price higher than the supplier's marginal cost; but the coordination fails if the dominant retailer is the only one who cares about fairness, and he obtains a lower profit than nobody cares about fairness. If the dominant retailer and the supplier have different degrees of trust on $c$-value, the retailer can not coordinate the channel with a markup pricing contract when only the supplier has fairness concerns.

Citation: Huimin Liu, Hui Yu. Fairness and retailer-led supply chain coordination under two different degrees of trust. Journal of Industrial & Management Optimization, 2017, 13 (3) : 1347-1364. doi: 10.3934/jimo.2016076
##### References:
 [1] E Anderson and S. D. Jap, The dark side of close relationships, MIT Sloan Management Review, 46 (2005), 75-82. [2] O. Caliskan-Demirag, Y. F. Chen and J. Li, Channel coordination under fairness concerns and nonlinear demand, European Journal of Operational Research, 207 (2010), 1321-1326. doi: 10.1016/j.ejor.2010.07.017. [3] S. C. Choi, Price competition in a channel structure with a common retailer, Marketing Science, 10 (1991), 271-296. doi: 10.1287/mksc.10.4.271. [4] P. N. Bloom and V. G. Perry, Retailer power and supplier welfare: The case of Wal-Mart, Journal of Retailing, 77 (2001), 379-396. doi: 10.1016/S0022-4359(01)00048-3. [5] M. C. Campbell, Perceptions of price unfairness: Antecedents and consequences, Journal of Marketing Research, 36 (1999), 187-199. doi: 10.2307/3152092. [6] K. Chen and T. Xiao, Demand disruption and coordination of the supply chain with a dominant retailer, European Journal of Operational Research, 197 (2009), 225-234. doi: 10.1016/j.ejor.2008.06.006. [7] K. Chen and P. Zhuang, Disruption management for a dominant retailer with constant demand-stimulating service cost, Computers & Industrial Engineering, 61 (2011), 936-946. doi: 10.1016/j.cie.2011.06.006. [8] T. Y. Choi and Z. Wu, Triads in supply networks: Theorizing buyer-supplier-supplier relationships, Journal of Supply Chain Management, 45 (2009), 8-25. doi: 10.1111/j.1745-493X.2009.03151.x. [9] T. H. Cui, J. S. Raju and Z. J. Zhang, Fairness and channel coordination, Management Science, 53 (2007), 1303-1314. [10] A. Dukes, T. Geylani and Y. Liu, Dominant retailers' incentives for product quality in asymmetric distribution channels, Marketing Letters, 25 (2014), 93-107. doi: 10.1007/s11002-013-9245-2. [11] G. Ertek and P. M. Griffin, Supplier-and buyer-driven channels in a two-stage supply chain, IIE Transactions, 34 (2002), 691-700. doi: 10.1080/07408170208928905. [12] E. Fehr and K. M. Schmidt, A theory of fairness, competition, and cooperation, The quarterly journal of economics, 114 (1999), 817-868. [13] A. Georgiades, Wal-Mart Canada, Lego pull apart over price tiff, Wall Street Journal(eastern edition), , 2008. [14] T. Geylani, A. J. Dukes and K. Srinivasan, Strategic manufacturer response to a dominant retailer, Marketing Science, 26 (2007), 164-178. doi: 10.1287/mksc.1060.0239. [15] T. H. Ho, X Su and Y. Wu, Distributional and peer-induced fairness in supply chain contract design, Production and Operations Management, 23 (2014), 161-175. [16] G. Iyer and J. M. Villas-Boas, A bargaining theory of distribution channels, Journal of Marketing Research, 40 (2003), 80-100. doi: 10.1509/jmkr.40.1.80.19134. [17] D. Kahneman, J. L. Knetsch and R. Thaler, Fairness as a constraint on profit seeking: Entitlements in the marke, The American Economic Review, (1986), 728-741. [18] S. Kolay and G. Shaffer, Contract design with a dominant retailer and a competitive fringe, Management Science, 59 (2013), 2111-2116. doi: 10.1287/mnsc.1120.1677. [19] N. Kumar, L. K. Scheer and J. B. E. M. Steenkamp, The effects of supplier fairness on vulnerable resellers, Journal of Marketing Research, 32 (1995), 54-65. doi: 10.2307/3152110. [20] A. Lau, H. Lau and J. Wang, Pricing and volume discounting for a dominant retailer with uncertain manufacturing cost information, European Journal of Operational Research, 183 (2007), 848-870. doi: 10.1016/j.ejor.2006.10.017. [21] A. Lau, H. Lau and J. Wang, How a dominant retailer might design a purchase contract for a newsvendor-type product with price-sensitive demand, European Journal of Operational Research, 190 (2008), 443-458. doi: 10.1016/j.ejor.2007.06.042. [22] Y. Liu, Y. Huang, Y. Luo and Y. Zhao, How does justice matter in achieving buyer-supplier relationship performance?, Journal of Operations Management, 30 (2012), 355-367. doi: 10.1016/j.jom.2012.03.003. [23] R. Narasimhan, S. Narayanan and R. Srinivasan, An Investigation of Justice in supply chain relationships and their performance impact, Journal of Operations Management, 31 (2013), 236-247. doi: 10.1016/j.jom.2013.05.001. [24] R. L. Oliver and J. E. Swan, Equity and disconfirmation perceptions as influences on merchant and product satisfaction, Journal of Consumer Research, 16 (1989), 372-383. doi: 10.1086/209223. [25] K. Pan, K. K. Lai, L. Liang and S. C. H. Leung, Two-period pricing and ordering policy for the dominant retailer in a two-echelon supply chain with demand uncertainty, Omega, 37 (2009), 919-929. doi: 10.1016/j.omega.2008.08.002. [26] K. Pan, K. K. Lai, S. C. H. Leung and D. Xiao, Revenue-sharing versus wholesale price mechanisms under different channel power structures, European Journal of Operational Research, 203 (2010), 532-538. doi: 10.1016/j.ejor.2009.08.010. [27] V. Pavlov and E. Katok, Fairness and Coordination Failures in Supply Chain Contracts working paper, 2009. doi: 10.2139/ssrn.2623821. [28] J. Raju and Z. J. Zhang, Channel coordination in the presence of a dominant retailer, Marketing Science, 24 (2005), 254-262. doi: 10.1287/mksc.1040.0081. [29] C. Rossetti and T. Y. Choi, On the dark side of strategic sourcing: Experiences from the aerospace industry, The Academy of Management Executive, 19 (2005), 46-60. doi: 10.5465/AME.2005.15841951. [30] Y. Shi and J. Zhu, Game-theoretic analysisi for a supply chain with distributional and peer-induced fairness concerned retailers, Management Science and Engineering, 8 (2014), 78-84. [31] X. Wang and L. Liu, Coordination in a retailer-led supply chain through option contract, International Journal of Production Economics, 110 (2007), 115-127. doi: 10.1016/j.ijpe.2007.02.022. [32] K. Wang, J. Sun, L. Liang and X. Li, Optimal contracts and the manufacturer's pricing strategies in a supply chain with an inequity-averse retailer, Central European Journal of Operations Research, 24 (2016), 107-125. doi: 10.1007/s10100-013-0335-2. [33] J. C. Wang, A. M. Wang and Y. Y. Wang, Markup pricing strategies between a dominant retailer and competitive manufacturers, Computers & Industrial Engineering, 64 (2013), 235-246. doi: 10.1016/j.cie.2012.09.009. [34] R. Yan, C. A. Myers and J. Wang, Price strategy, information sharing, and firm performance in a market channel with a dominant retailer, Journal of Product & Brand Management, 21 (2012), 475-485. [35] J. Yang, J. Xie, X. Deng and H Xiong, Cooperative advertising in a distribution channel with fairness concerns, European Journal of Operational Research, 227 (2013), 401-407. doi: 10.1016/j.ejor.2012.12.011.

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##### References:
 [1] E Anderson and S. D. Jap, The dark side of close relationships, MIT Sloan Management Review, 46 (2005), 75-82. [2] O. Caliskan-Demirag, Y. F. Chen and J. Li, Channel coordination under fairness concerns and nonlinear demand, European Journal of Operational Research, 207 (2010), 1321-1326. doi: 10.1016/j.ejor.2010.07.017. [3] S. C. Choi, Price competition in a channel structure with a common retailer, Marketing Science, 10 (1991), 271-296. doi: 10.1287/mksc.10.4.271. [4] P. N. Bloom and V. G. Perry, Retailer power and supplier welfare: The case of Wal-Mart, Journal of Retailing, 77 (2001), 379-396. doi: 10.1016/S0022-4359(01)00048-3. [5] M. C. Campbell, Perceptions of price unfairness: Antecedents and consequences, Journal of Marketing Research, 36 (1999), 187-199. doi: 10.2307/3152092. [6] K. Chen and T. Xiao, Demand disruption and coordination of the supply chain with a dominant retailer, European Journal of Operational Research, 197 (2009), 225-234. doi: 10.1016/j.ejor.2008.06.006. [7] K. Chen and P. Zhuang, Disruption management for a dominant retailer with constant demand-stimulating service cost, Computers & Industrial Engineering, 61 (2011), 936-946. doi: 10.1016/j.cie.2011.06.006. [8] T. Y. Choi and Z. Wu, Triads in supply networks: Theorizing buyer-supplier-supplier relationships, Journal of Supply Chain Management, 45 (2009), 8-25. doi: 10.1111/j.1745-493X.2009.03151.x. [9] T. H. Cui, J. S. Raju and Z. J. Zhang, Fairness and channel coordination, Management Science, 53 (2007), 1303-1314. [10] A. Dukes, T. Geylani and Y. Liu, Dominant retailers' incentives for product quality in asymmetric distribution channels, Marketing Letters, 25 (2014), 93-107. doi: 10.1007/s11002-013-9245-2. [11] G. Ertek and P. M. Griffin, Supplier-and buyer-driven channels in a two-stage supply chain, IIE Transactions, 34 (2002), 691-700. doi: 10.1080/07408170208928905. [12] E. Fehr and K. M. Schmidt, A theory of fairness, competition, and cooperation, The quarterly journal of economics, 114 (1999), 817-868. [13] A. Georgiades, Wal-Mart Canada, Lego pull apart over price tiff, Wall Street Journal(eastern edition), , 2008. [14] T. Geylani, A. J. Dukes and K. Srinivasan, Strategic manufacturer response to a dominant retailer, Marketing Science, 26 (2007), 164-178. doi: 10.1287/mksc.1060.0239. [15] T. H. Ho, X Su and Y. Wu, Distributional and peer-induced fairness in supply chain contract design, Production and Operations Management, 23 (2014), 161-175. [16] G. Iyer and J. M. Villas-Boas, A bargaining theory of distribution channels, Journal of Marketing Research, 40 (2003), 80-100. doi: 10.1509/jmkr.40.1.80.19134. [17] D. Kahneman, J. L. Knetsch and R. Thaler, Fairness as a constraint on profit seeking: Entitlements in the marke, The American Economic Review, (1986), 728-741. [18] S. Kolay and G. Shaffer, Contract design with a dominant retailer and a competitive fringe, Management Science, 59 (2013), 2111-2116. doi: 10.1287/mnsc.1120.1677. [19] N. Kumar, L. K. Scheer and J. B. E. M. Steenkamp, The effects of supplier fairness on vulnerable resellers, Journal of Marketing Research, 32 (1995), 54-65. doi: 10.2307/3152110. [20] A. Lau, H. Lau and J. Wang, Pricing and volume discounting for a dominant retailer with uncertain manufacturing cost information, European Journal of Operational Research, 183 (2007), 848-870. doi: 10.1016/j.ejor.2006.10.017. [21] A. Lau, H. Lau and J. Wang, How a dominant retailer might design a purchase contract for a newsvendor-type product with price-sensitive demand, European Journal of Operational Research, 190 (2008), 443-458. doi: 10.1016/j.ejor.2007.06.042. [22] Y. Liu, Y. Huang, Y. Luo and Y. Zhao, How does justice matter in achieving buyer-supplier relationship performance?, Journal of Operations Management, 30 (2012), 355-367. doi: 10.1016/j.jom.2012.03.003. [23] R. Narasimhan, S. Narayanan and R. Srinivasan, An Investigation of Justice in supply chain relationships and their performance impact, Journal of Operations Management, 31 (2013), 236-247. doi: 10.1016/j.jom.2013.05.001. [24] R. L. Oliver and J. E. Swan, Equity and disconfirmation perceptions as influences on merchant and product satisfaction, Journal of Consumer Research, 16 (1989), 372-383. doi: 10.1086/209223. [25] K. Pan, K. K. Lai, L. Liang and S. C. H. Leung, Two-period pricing and ordering policy for the dominant retailer in a two-echelon supply chain with demand uncertainty, Omega, 37 (2009), 919-929. doi: 10.1016/j.omega.2008.08.002. [26] K. Pan, K. K. Lai, S. C. H. Leung and D. Xiao, Revenue-sharing versus wholesale price mechanisms under different channel power structures, European Journal of Operational Research, 203 (2010), 532-538. doi: 10.1016/j.ejor.2009.08.010. [27] V. Pavlov and E. Katok, Fairness and Coordination Failures in Supply Chain Contracts working paper, 2009. doi: 10.2139/ssrn.2623821. [28] J. Raju and Z. J. Zhang, Channel coordination in the presence of a dominant retailer, Marketing Science, 24 (2005), 254-262. doi: 10.1287/mksc.1040.0081. [29] C. Rossetti and T. Y. Choi, On the dark side of strategic sourcing: Experiences from the aerospace industry, The Academy of Management Executive, 19 (2005), 46-60. doi: 10.5465/AME.2005.15841951. [30] Y. Shi and J. Zhu, Game-theoretic analysisi for a supply chain with distributional and peer-induced fairness concerned retailers, Management Science and Engineering, 8 (2014), 78-84. [31] X. Wang and L. Liu, Coordination in a retailer-led supply chain through option contract, International Journal of Production Economics, 110 (2007), 115-127. doi: 10.1016/j.ijpe.2007.02.022. [32] K. Wang, J. Sun, L. Liang and X. Li, Optimal contracts and the manufacturer's pricing strategies in a supply chain with an inequity-averse retailer, Central European Journal of Operations Research, 24 (2016), 107-125. doi: 10.1007/s10100-013-0335-2. [33] J. C. Wang, A. M. Wang and Y. Y. Wang, Markup pricing strategies between a dominant retailer and competitive manufacturers, Computers & Industrial Engineering, 64 (2013), 235-246. doi: 10.1016/j.cie.2012.09.009. [34] R. Yan, C. A. Myers and J. Wang, Price strategy, information sharing, and firm performance in a market channel with a dominant retailer, Journal of Product & Brand Management, 21 (2012), 475-485. [35] J. Yang, J. Xie, X. Deng and H Xiong, Cooperative advertising in a distribution channel with fairness concerns, European Journal of Operational Research, 227 (2013), 401-407. doi: 10.1016/j.ejor.2012.12.011.
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