The Horizontal Fairness Concern of Backup Supplier in a Triadic Supply Chain

Abstract

We consider a triadic supply chain, in which a manufacturer can sequentially source from two suppliers: a cheap primary supplier with yield uncertainty risk; and an expensive backup supplier with perfect reliability. After having a contract with the primary supplier, the manufacturer may offer a contract to the backup supplier to mitigate the yield uncertainty of the primary supplier. In such a setting, the backup supplier may have horizontal fairness concerns. We model the contract design problem using a Stackelberg game and characterize optimal decisions for the manufacturer. We provide empirical evidence of horizontal fairness concern from the backup supplier by conducting experiments. Furthermore, the impact of the fairness concern on the supply chain performance is analyzed. The results show that the manufacturer should pay close attention to the fairness concern of the backup supplier, and that the fairness concern does not always benefit the backup supplier.