Optimal decision making considering retailer fairness concerns in a supply chain under advance selling

Abstract

When market demand is uncertain, manufacturers who produce seasonal products may adopt an advance selling strategy to sell these products to retailers in advance. This study develops a two-period Stackelberg game model. In the advance period, the manufacturer first sets the wholesale price, allowing the retailer to order products in advance. Then, in the spot period, the manufacturer determines the wholesale price of this period, and the retailer can order products again. Finally, all ordered products are sold at the retail price in this period. Considering that the retailer exhibits fairness concerns, this study investigates whether and how the psychological factor affects the manufacturer’s wholesale prices, the retailer’s order quantities, and the profits of both parties. Through comparative analysis, we find that the retailer’s fairness concerns lead the manufacturer to lower the wholesale price in the spot period, with the extent of the price reduction increasing with the strength of fairness concerns. However, it will remain unchanged after it increases to a certain threshold. Although the retailer’s fairness concerns negatively impact the manufacturer, the manufacturer’s profit remains larger than that of the retailer. Additionally, when the product quantity provided by the manufacturer is relatively large and the retailer’s strength of fairness concerns is large, we also find that the retailer may prefer to forgo ordering products in the advance period and instead order more products in the spot period.