Optimal Contract Design Problem Considering the Retailer’s fairness concern with asymmetric demand information

Abstract

Few works study the manufacturer’s optimal decisions in a supply chain considering the downstream retailer’s fairness concern with asymmetric demand information. Assuming that the retailer possesses private demand information and shows fairness concern behavior and that the manufacturer produces products with or without green quality, this paper derives the manufacturer’s optimal contract to screen the retailer’s private information. A basic model in which the manufacturer produces nongreen products is examined. Then, comparisons are conducted to further investigate the influences of the retailer’s fairness concern behavior and the greenness degree of products on the decision making within the supply chain, the manufacturer’s expected profits and the retailer’s expected utilities. The results show that the manufacturer can always benefit from producing green products. The retailer’s fairness concern behavior and the greenness degree of products can induce the manufacturer to change the optimal contract design strategy. Our findings can provide several managerial references for green supply chain management.