Supply Chain Contract Coordination Incorporating Fairness Preference

“We don’t compete as individual businesses any more; we compete as supply chains,” says Martin Christopher, emeritus professor of marketing and logistics, indicating that members in a certain supply chain should no longer seek profit maximization of their own, instead, they should work together to coordinate the supply chain. That’s why we should incorporate the concept of fairness preference. Research in behavioral economics has shown that individuals are motivated by concerns of fairness. Therefore, we incorporate this concept in a conventional channel which consists of one manufacturer and one retailer. The manufacturer should decide the wholesale price while the retailer should decide the quantity to order. In this research, we also propose supply chain contracts such as buy back contract and revenue sharing contract to coordinate the supply chain with fairness concerns. Then we conduct the numerical analysis to observe the supply chain members’ strategy and eventually confirm that supply chain contracts is efficient enough even the supply chain is in its fairness condition.