Fairness-embedded governmental coordination by dominated retailer in heterogeneous circumstance

Abstract

Market demand is positively affected by the investments in marketing and quality improvement. In a retailer dominated supply chain, the manufacturer takes charge of product quality improvement and the retailer focuses on marketing. The investments on cooperative marketing and product quality improvement in supply chains are known to be heterogeneous investment, where the manufacturer (he) is fairness sensitive and the retailer (she) is fairness insensitive. Due to the manufacturer’s conservative investment resulting from this sensitivity of fairness, the retailer shares a proportion of the manufacturer’s investment to increase his investment. It is found that the manufacturer’s fairness negatively affects his investment and the manufacturer sometimes tends to be a ‘free rider’ under decentralized decision patterns, which lead to a poor supply chain performance. This study also proves that both the manufacturer and the retailer are motivated to cooperate under centralized patterns, where the retailer’s objective is additional expected profit and the manufacturer’s objective is enlarging his utility. Based on the comparison of equilibrium solutions in decentralized and centralized patterns, this study suggests the range of cost-sharing proportion for supply chain coordination. The example shows the effectiveness of the provided supply chain coordination.