Coordination of a supply chain with Nash bargaining fairness concerns

Abstract

This study incorporates fairness concerns in a dual-channel supply chain where a single manufacturer sells its product to consumers through a single retailer. The objective is to investigate the implication of fairness in conjunction with channel coordination and contracting mechanisms. To this end, we develop a game-theoretic utility model where the Nash bargaining fairness reference is leveraged to capture the impact of fairness preference on three widely used contracting mechanisms—wholesale price, buy-back, and revenue-sharing. First, we derive the optimal order quantity for both centralized and decentralized channels, and show that channel coordination is easier than that under a conventional channel when the retailer is more concerned about fairness, and his bargaining power is not strong. Second, for buy-back and revenue-sharing contracts, we acquire the equilibrium wholesale price to achieve supply chain coordination. Our analysis shows that the implication of fairness-concerns of channel members can enhance the whole supply chain performance to some extent, especially, when the manufacturer is more concerned about fairness and the bargaining power is sufficiently strong, or the retailer is more concerned with fairness and the bargaining power is relatively weak. Finally, numerical studies are conducted to quantify the impact of the fairness concerns and retailer’s bargaining power on the coordination performance, the equilibrium wholesale price, and the channel efficiency. Some useful managerial insights are provided. For example, when the buy-back and revenue-sharing coordination contracts are employed, the fairness concerns could improve the channel performance under certain conditions.