Production, Manufacturing and LogisticsGenerous, spiteful, or profit maximizing suppliers in the wholesale price contract: A behavioral study
Section snippets
Introduction and literature review
Pure profit maximization is often assumed to motivate operational decision making, but community and social pressures also guide individual decision makers (Gorman and Kehr, 1992, Kahneman et al., 1986). For example, in the “fair-trade” movement, relatively powerful retailers pay higher prices for comparable order quantities in order to more fairly allocate supply chain profits to their relatively vulnerable suppliers (Moore, 2004). Managerially, it is crucial to identify the underlying causes
Model and hypotheses
Based on traditional fairness-minded utility functions and their role in the newsvendor problem (Bolton, 1991, Cui et al., 2007, Fehr and Schmidt, 1999, Katok et al., 2014, Wu and Niederhoff, 2014), the utility-maximizing result for fairness depends on two factors: the degree of concern a subject has for achieving fairness and the subject's ideal allocation. This ideal allocation is sometimes modeled using a scale factor, k,1
Experimental design and participants
The study had five between-subject treatments. These five treatments differed in their underlying demand distribution for the retailer, and therefore the treatments yielded different order quantities to the supplier at any given price (see Figs. 2 and 3 for two of the treatments). In this way, the price which optimized the supplier's profit (calculated as (price - $5)*(order quantity)) occurred at a low price in Treatments 1 and 2, a mid-range price for Treatment 3, and high prices for
Ordering effects
In order to gauge their social preferences, subjects were asked to identify what they felt was a fair allocation to themselves in general. To determine if the ordering of the questions influenced pricing decisions and/or the reported FAIR values, the question of FAIR was posed prior to the decision for about half of the subjects (54.8 percent). The remaining subjects (45.2 percent) were asked after pricing decisions were made, thereby avoiding priming for fairness before the decision screens.
No
Discussion
Within each treatment, our decision makers’ aggregate results are consistent with prior results: in treatments where the supplier could greatly benefit at the expense of the retailer and system (those with high double marginalization), the average price was set below the profit-maximizing price. This result yielded an average 42.3 percent (39.4 percent) reduction of the double marginalization penalty to the system relative to the supplier's profit-maximizing contract for the T4: 90 percent
Conclusion
The fact that the wholesale contract does not perform exactly as prescribed by traditional profit maximization analysis is not a surprise. Prior experimental results show that, in aggregate, decision makers as suppliers do not set contracts to maximize supplier profits. While misunderstanding or poor calculations contribute to some of the errors, we show that the majority of suppliers who deviate from the optimal contract are willing to sacrifice their own profits to reach a more equitable
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By-state fairness in selling to the newsvendor
2022, Transportation Research Part E: Logistics and Transportation ReviewCitation Excerpt :In addition, some researchers investigate fairness in a newsvendor setting with behavioral experiments. The results show that fairness is a prominent aspect in the contexts of supply chain contracting with random demand (Niederhoff and Kouvelis, 2016; Zhao et al., 2019; Niederhoff and Kouvelis, 2019), and can be reinforced over a perceived long-term contractual relationship (Wu, 2013). However, although these experimental studies find that fairness matters, they cannot determine whether it is by-expectation fairness at play.
Coordinating a closed loop supply chain with fairness concern by a constant wholesale price contract
2021, European Journal of Operational ResearchInequity aversion in dynamically complex supply chains
2021, European Journal of Operational ResearchCitation Excerpt :Qin, Mai, Fry and Raturi (2016) further investigate how fairness concerns influence supply chain decision-making and find that they lead to greater supply chain profits and a more balanced profit distribution. Niederhoff and Kouvelis (2016) show that suppliers consistently make wholesale price decisions according to predictions of fairness models. A common thread in this research area has been the use of rather simple settings, mainly dyadic channels with a single supplier and retailer.
Rawlsian fairness in push and pull supply chains
2021, European Journal of Operational ResearchCitation Excerpt :One stream of empirical literature investigates suppliers’ fairness concern under full information. Niederhoff and Kouvelis (2016) consider five between-subject treatments underlying different demand distributions. They show that suppliers with a high degree of fairness concern try to approach their ideal allocations of channel profits in their decision making.
Limited-trust equilibria
2021, European Journal of Operational ResearchImpact of fairness concern on retailer-dominated supply chain
2020, Computers and Industrial EngineeringCitation Excerpt :Their laboratory study reveals that fairness (inequality aversion) and incomplete information about the retailer’s degree of fairness can explain retailer and supplier behavior, respectively. Several studies have also indicated that wholesale contracts are not properly executed as prescribed by the traditional profit maximization analysis because suppliers are willing to sacrifice their income to reach an equitable profit distribution (Niederhoff & Kouvelis, 2016). Cui, Raju, and Zhang (2007) analyze the impacts of supply chain members’ fairness concerns on channel coordination and indicate that fairness concerns may indeed have a mediating impact and render the inefficient wholesale price contract into a coordinating one.