Coordinating a closed loop supply chain with fairness concern by a constant wholesale price contract

Abstract

The literature on closed loop supply chains (CLSCs) has ignored advantageous inequality aversion while modelling the fairness concern of channel partners and demonstrated that coordinating a decentralised channel requires complex price contracts. In this paper, we show that a constant wholesale price contract can coordinate a decentralised channel in a manufacturer-led CLSC if the retailer's advantageous inequality aversion is sufficiently strong. The result is valid for a range of equitable shares of the channel profit, such that the allocated share of the manufacturer is larger than that of the retailer, and the retailer's share is greater than a minimum threshold. Used product collection rate and channel profit are higher when the retailer is inequality averse compared to when she is a profit maximiser. The results are independent of whether the end-of-use products are collected by the manufacturer or the retailer. We also show that the collection rate is higher, and both channel partners are better-off, under the manufacturer collection model. To obtain these results, we solve multistage sequential move games under the two collection models. We apply Karush–Kuhn–Tucker conditions for constrained optimisation, to determine the boundaries for the existence of the subgame perfect Nash equilibrium.