Coordinating socially responsible supply chain with fairness via simple wholesale price contract

Abstract

This paper investigates how fairness of retailer may affect the channel coordination of a dyadic supply chain comprising one manufacturer and one retailer, when the manufacturer exhibits CSR. Previous studies have shown that a manufacturer can achieve channel coordination (i.e., maximum channel profit and utility) with a simple wholesale price contract when the retailer is sufficiently fair (i.e., his disadvantageous inequity aversion is above a certain threshold value). However, this paper has been designed to examine whether the fairness sufficiency of retailer can be influenced by manufacturer's CSR activity. To this end, we mathematically formulate the manufacturer-led Stackelberg game theoretic framework, where the manufacturer exhibits CSR and the retailer is fairness concerned. We consider equitable payoff as the fairness reference to formulate the utility function of fair retailer. The paper adopts this approach because it captures the supply chain members' contributions and depends on the best external option available to each member. To obtain boundaries for the subgame perfect Nash equilibrium, we apply Karush-Kuhn-Tucker (KKT) conditions for constrained optimization. The results show that when the manufacturer exhibits CSR, the fairness concerned retailer will choose the channel coordinating price if his disadvantageous inequity aversion is above a further lower threshold value. Thus, the manufacturer's CSR can be helpful in moderating the retailer's fairness sufficiency to achieve channel coordination via simple wholesale price contract. For practical implications, it suggests that a fairness concerned retailer's aversion to inequitable profit distribution can be moderated by the manufacturer's CSR/welfare activities.