Procedural fairness concern in tourism supply chain: The case of a dominant OTA and a sustainable hotel

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Highlights

  • Procedural fairness concern is considered in a tourism supply chain.

  • The fairness concern is characterized by engagement, consistency, and transparency.

  • OTA’s two choice schemes about the commission decision is analyzed.

  • A minimum environmental cost that achieves the optimal channel profit is derived.

  • OTA relinquishes the right to determine commission when hotel is fairness-concerned.

Abstract

Environmental tourism has drawn widespread attention and has encouraged hotels to use sustainable materials or equipment in rooms to attract environmentally conscious consumers. Hotels must cooperate with the Online Travel Agent (OTA) to increase sales. This paper considers a hotel’s procedural fairness concern when the environmental sales effort is the OTA’s private information. An OTA decides the level of environmental sales effort and whether to afford the commission decision right to the hotel. The hotel decides the room price and environmental effort. Equilibrium solutions show a positive minimum environmental cost in the centralized model at which both the hotel and OTA can achieve the optimal channel profit. In the decentralized model, we find that when the hotel only considers his profit, the OTA always imposes commission. When the hotel has procedural fairness concern, however, the optimal choice scheme exists whereby the OTA relinquishes his right to make a decision regarding commission.

Introduction

With the development of the Internet, a growing number of hotels tend to cooperate with online travel agents (OTA) but the OTA acts as a dominator due to attracting considerable user traffic. At the same time, with growing levels of environmental awareness among consumers, consumers are now more willing to pay higher prices for environmentally friendly products, promoting the development of a sustainable supply chain Chitra (2007). Hotels that integrate sustainable approaches (i.e., environmental effort) into management practices through the application of environmental protection, health and safety concepts, sustainable facilities, or environmental products to attract consumers are called “sustainable hotels” (Font et al., 2016).

In July 2016, an announcement entitled “A Breakup Letter to Ctrip” drew public attention on the Internet. Ctrip.com is one of the largest OTAs in China. A small hotel who signed a contract with Ctrip complained about Ctrip’s irrational decision to increase commission. The main reason for the hotel’s dissatisfaction is that the commission should be increased by rising sales effort. The hotel does not see a change for some observable sales efforts, including online advertising and ranking. Sales efforts such as offline advertising and product development are difficult for the hotel to observe. The information asymmetry between two parties causes moral hazard, whereby the OTA maximizes profit by damaging the hotel’s profit. As a result, the hotel chooses to terminate cooperation with Ctrip. The announcement implies that rather than being concerned about the OTA’s decision to increase the commission, the hotel is more concerned with the procedure used to arrive at this decision. The illogical nature of the decision further contributed to sustainable hotel dissatisfaction. For sustainable hotels, the OTA’s unobservable environmental sales efforts (e.g., environmental marketing, design of eco-tourism routes) also form an important basis for increasing demand (Loosschilder et al., 2017, van der Rest et al., 2016). Therefore, it is meaningful to consider the procedural fairness concern of sustainable hotels under information asymmetry. Our work is motivated by the conflict between the dominant OTA and the sustainable hotel. The main characteristics of this conflict are as follows: (1) the sustainable hotel develops the OTA channel to increase profit; (2) the OTA has more bargaining power due to having more information as an e-commerce platform. As the breakdown of cooperation often occurs, the hotel’s procedural fairness concern is critical to the relationship between the two parties.

This paper studies a dynamic game involving a sustainable hotel with procedural fairness concern and a dominant OTA in the tourism supply chain. The hotel needs to decide the room price and environmental effort. The OTA decides the level of environmental sales effort and whether to give the commission decision right to the hotel. Therefore, the OTA is presented with two choice schemes: (1) the OTA decides the commission (without-engagement scheme) to increase profit to the detriment of the hotel; (2) the OTA gives the commission decision right to the hotel (engagement scheme). The latter choice may result in a drop in the OTA’s profit but with less possibility of sacrificing cooperation between the two parties. We introduce three aspects (i.e., engagement, consistency, and transparency) to characterize the hotel’s procedural fairness concern. When the hotel can decide the commission (i.e., “engagement”), the hotel perceives this arrangement as fair. The hotel compares the expected profit with the expected reference profit (i.e., “consistency”) under information asymmetry to judge whether he is treated fairly. Additionally, the “transparency” of information leaves the hotel’s uncertainty about the OTA’s environmental sales effort under information asymmetry, thus, “transparency” also affects the hotel’s fairness concern. We study how to derive the optimal choice scheme for the OTA under the condition of the decentralized tourism supply chain and to achieve the coordination of the tourism supply chain.

We obtain several important findings. First, the hotel and the OTA must pay a positive minimum environmental cost to maximize the channel profit. Second, when the hotel has no fairness concern, the OTA always chooses engagement scheme. However, when the hotel has procedural fairness concern, we find that engagement scheme may become the OTA’s preferred choice. This choice enables two parties to improve profits and build a more stable relationship. This result is consistent with the practice. For example, in April 2019, Marriott International signed an exclusive distribution contract with Expedia.com, indicating that Expedia has given Marriott a certain decision space in terms of the commission. The two parties gained more profits through this contract. Third, we consider the issues of supply chain coordination in the model extension and find that the cost-sharing contract can coordinate the tourism supply chain. Moreover, our results suggest that the hotel’s environmental cost has a stronger impact on the profits of both parties than the OTA’s environmental cost under a cost-sharing contract.

Our research makes the following contributions to the literature. First, previous theoretical research on hotel supply chain management did not consider fairness concern, and we fill this gap and consider three characteristics of procedural fairness (i.e., engagement, consistency, and transparency). Moreover, we build a mathematical model to describe the consistency of procedural fairness and thus diverge from experimental studies on consistency (Bos et al., 1996, Schminke et al., 2000). Second, we find that procedural fairness concern of the hotel can affect the OTA’s optimal choice scheme and benefit both the hotel and the OTA. Specifically, in the absence of procedural fairness, the OTA always chooses to decide the commission by itself. In contrast, if fairness concern of the hotel is considered, the OTA may give up the commission decision and give it to the hotel. Through model analysis, we can provide some practical suggestions for OTAs and hotels in the tourism industry. Third, we propose a cost-sharing contract that enables the tourism supply chain to coordinate when the hotel has procedural fairness concern.

This paper is structured as follows. Section 2 provides a literature review. Section 3 introduces the basic setting and variable definitions of the model. The equilibrium solutions of centralized tourism supply chain model are given in Section 4. Section 5 derives the optimal choice scheme of the OTA and analyzes the equilibrium solutions of the decentralized tourism supply chain without procedural fairness concern. Sections Section 6 explores the optimal choice scheme of the decentralized tourism supply chain with procedural fairness concern. Section 7 introduces the cost-sharing contract to achieve supply chain coordination. We conclude the paper and provide some research directions in the future in Section 8.

Section snippets

Literature review

Our paper is closely related to four main streams of literature: (1) sustainable supply chain management (SSCM) in tourism; (2) fairness concern in the supply chain; (3) business models between the hotel and the OTA; (4) information asymmetry in the supply chain.

Brandenburg and Rebs (2015) propose a systematic review of the research direction of SSCM. Most researchers study SSCM in manufacturing (Allevi et al., 2018, Ma et al., 2017). However, SSCM in tourism is also noticed by scholars. 

The model

We develop a model that includes a dominant OTA and a sustainable hotel with procedural fairness concern under the agency model. There are two sales channels in the hotel: a direct channel and a distribution channel (OTA channel).

In the agency model, the OTA only helps the hotel sell rooms by charging commission while the hotel manages all rooms and decides the price of different channels. The cooperative arrangement achieved between Marriott and Expedia serves as an example of such condition.

Centralized tourism supply chain model

The hotel and the OTA can be interpreted as a whole system in the centralized tourism supply chain. The room price, environmental effort, and environmental sales effort are decided by the system simultaneously. The decision results of the channel profit serve as a benchmark for the decentralized model. To simplify the model, we normalize c=0, which does not affect our results. Then, the expected channel profit is: E[Πc(pc,yc,ec)]=E[πo]+E[πh]=pc(D1+D2)ξyc22ηec22.

Lemma 1

When η>(γ1)2ξ4bξ4 and ξ>1b,

Decentralized tourism supply chain model without procedural fairness concern

From the contradiction between the hotel and the OTA, the hotel and the OTA do not make decisions as a whole system. Therefore, we consider the optimal equilibrium solutions obtained by the two parties under the decentralized tourism supply chain model. We first consider the optimal decisions made by both parties without procedural fairness concern. The hotel and the OTA’s targets are to maximize their expected profits. In this section, we obtain the optimal choice scheme of the OTA when the

Decentralized tourism supply chain model with procedural fairness concern

Under asymmetric information, the OTA usually exaggerates the environmental sales effort, which the hotel finds difficult to confirm. This condition leaves the hotel suspicious of the authenticity of the OTA’s environmental sales effort. Such uncertainty affects the hotel’s utility. Therefore, when the hotel has procedural fairness concern, based on the above notations, the following utility functions of the OTA and the hotel are given by Eqs. (5), (6). We need to consider the impact on the

Supply chain coordination under procedural fairness concern

Comparing the equilibria obtained from the centralized and the decentralized models, we find that the latter’s equilibrium cannot achieve supply chain coordination due to double marginalization. In this section, we propose a contract that can coordinate the tourism supply chain under procedural fairness concern and derive the optimal profits of both parties after achieving coordination. We then present sensitivity analysis and discussions of the optimal profit, and obtain managerial insights.

Concluding remarks and future research

Through the connection with the OTA channel, the hotel can obtain higher profit. However, due to the high bargaining power brought by information advantage to OTA, the cooperation between hotel and OTA breaks down from time to time. Therefore, it is necessary to consider the hotel’s fairness concern in supply chain management. This paper incorporates the sustainable hotel’s procedural fairness concern into the tourism supply chain and characterizes procedural fairness using engagement, consisten

CRediT authorship contribution statement

Yangguang Zhu: Conceptualization, Methodology, Writing – review, Funding acquisition. Yuan Chen: Conceptualization, Methodology, Software, Writing – review & editing. Xin Wang: Conceptualization, Methodology, Software, Writing – review & editing. Tengfei Nie: Conceptualization, Methodology, Software, Writing – review, Funding acquisition. Shaofu Du: Conceptualization, Methodology, Supervision, Funding acquisition.

Acknowledgments

Our research was supported by National Natural Science Foundation of China (Grant Nos. 72271078, 71971201, 71801073, 72071193, 72293582, 72293580), National Social Science Fund of China (No. 21&ZD129), Top-Notch Young Talents Program of China, and the Fundamental Research Funds for the Central Universities, PR China (Grant Nos. KY2040000049, WK2040000027). The authors also would like to thank the Young Taishan Scholars Program of Shandong Province, PR China (No. tsqn202103024) and the Qilu

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