Price squeeze under fairness: the road to supply chain coordination with a powerful retailer

Abstract

This research investigates the impacts of the manufacturer’s fairness concerns on the supply chain performance when the power retailer implements a price squeeze and market service investment together. Through game-theoretic modeling, we find that 1) in the absence of fairness, although the manufacturer may be worse off due to possessing imperfect information on the price squeeze rate, the channel may be coordinated through an ex-ante negotiation between the two parties. 2) When the manufacturer has fairness concerns for price squeeze, both channel performance and brand goodwill are made worse by disadvantageous inequality and improved by advantageous inequality versus the case of no fairness concerns. Furthermore, channel members’ ex-ante negotiations regarding a profit reallocation scheme under certain conditions may achieve the following three objectives: generating a channel profit of the coordination level, promoting brand goodwill to the level of the integrated channel, and creating an equitable channel relationship.

Keywords:

• behavioral operations management
• power retailer
• fairness
• channel coordination
• price squeeze
• bargaining

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

1 In 2008, the China Supplier Research Center of Beijing Business Management College conducted a field research to study the survival situation of suppliers in China. They performed a survey of over 1000 suppliers from more than 20 cities.

2 It is more difficult for the manufacturer to assess the true relative bargaining power of two parties in the channel than for the retailer, as the manufacturer is less powerful in the channel and thus has less control over the final price squeeze ratio compared with the retailer.

3 We do not list the expressions for equilibrium decisions and results for Model C, as they are a special case of model CD. Instead, we conduct numerical analysis as shown in Figure 4.

4 In our model settings, Model C refers to the decentralized channel with only the manufacturer being fairness concerned. Cui et al. (2007) and Caliskan-Demirag et al. (2010) also discuss similar model settings and get similar findings in the footnote 7 (page 1308) and Section 2.3, respectively. The major difference between our model and their models lies in that the retailer in our model makes an extra decision on the market service investment.

5 Under this case, the parameter scope I occurs, the price squeeze rate can be as low as the lower bound as shown in the first row of Table 4, and the resulting retailing price, market investment level, and profits for both parties can be calculated according to the first column of Table 3. The analysis below Proposition 2 has also shown that the channel would not be coordinated under the case of disadvantageous inequality aversion. 

6 Note that Equation B4 is not concave for some parametric values.

Additional information

Funding

This work was supported by National Natural Science Foundation of China: [grant number 72102194, 72025201, 72061127001]; Fundamental Research Funds for the Central Universities [grant number kjcx20210105].