Fairness and Competition in Supply Chains

In supply chain transactions, members care how profit is distributed as well as their own payoff. A retailer prefers fairness when he earns less than his supplier. While existing research focuses on fairness in the vertical competition between an upstream supplier and a downstream retailer, this paper studies the impacts of fairness when a retailer is engaged simultaneously in vertical competition with the supplier and in horizontal competition with other retailers. In particular, we consider a setting where a supplier sells differentiable products through two retailers who compete either on quantity or on price. We analyze the influence of fairness on the behavior and performance of the supply chain members. We characterize and compare equilibrium solutions in different competition situations. Our analysis identifies circumstances where fairness may influence the economic outcomes to the fair-minded, the rational retailers, and the supply chain as a whole for either better or worse. More importantly, we find that the presence of horizontal competition can reverse the impact of fairness.