Supply-chain performance anomalies: Fairness concerns under private cost information

• Published in: European journal of operational research Vol. 252; no. 1; pp. 170 - 182
• Main Authors: Qin, Fei, Mai, Feng, Fry, Michael J., Raturi, Amitabh S.
• Format: Journal Article
• Language: English
• Published: Amsterdam Elsevier B.V 01.07.2016; Elsevier Sequoia S.A
• Subjects: Behavioral operations; Contracts; Decision making; Experiments; Fairness concerns; Feeding; Human performance; Human subjects; Information; Laboratories; Mathematical analysis; Mathematical models; Private cost information; Production costs; Rationality; Studies; Suppliers; Supply chain; Supply chain management; Utility functions; Supply chain; Private cost information; Behavioral operations; Fairness concerns
• ISSN: 0377-2217; 1872-6860
• DOI: 10.1016/j.ejor.2016.01.033

•We conduct experiments to investigate how fairness concerns influence supply-chain decision making.•We develop a behavioral model embedding fairness concerns into the utility functions.•We show that the supply-chain performance anomalies are mostly due to fairness concerns under a simple wholesale contract.•We illustrate that private cost information reduces fairness concerns in a decentralized supply chain. This work investigates how fairness concerns influence supply-chain decision making, while examining the effect of private production-cost information and touching on issues related to bounded rationality. We conduct laboratory work utilizing a supply-chain dyad with an upstream supplier feeding a downstream retailer under a simple wholesale-price contract. We perform human–computer (H–C) experiments where human subjects play the role of the supplier paired with the computerized retailer, as well as human–human (H–H) experiments where human subjects play the role of both supplier and retailer. These experiments allow us to isolate other effects like bounded rationality from the effects of fairness concerns on supply-chain decision making. We find that, compared to standard analytical model, the bounded rationality slightly reduces overall supply chain profit without changing its distribution between the supplier and the retailer, while fairness concerns lead to greater supply-chain profits and a more balanced supply-chain profit distribution. We further illustrate that under private cost information, the retailer's fairness concern is suppressed by the lack of reciprocity from not being able to observe her rival's profit information, but that the supplier's fairness concern from altruism persists. Based on our experimental results, we modify classical supply-chain models to include utility functions that incorporate both bounded rationality and fairness concerns. The estimated other-regarding coefficients are significantly lower under private information than under public information for the H–H experiments, and we find no evidence of inequity aversion for the H–C experiments.