By-state fairness in selling to the newsvendor

Previous studies assume that the decision makers under supply chain contracting built on the newsvendor problem have by-expectation fairness concerns, that is, an aversion to the inequality of expected profits. However, recent experimental data show that they are actually averse to the inequality of profits at each demand realization, which is referred to as by-state fairness concerns. This paper examines how by-state fairness concerns (only disadvantageous inequality aversion) influence the equilibrium outcomes under a selling-to-the-newsvendor model. Compared with the fairness-neutral case, while the retailer’s concern for by-expectation fairness (only disadvantageous inequality aversion) can improve supply chain performance, his strong concern for by-state fairness can worsen it. In particular, when demand variance is large, the retailer can earn less for by-state fairness concerns. Similar to by-expectation fairness, the supplier’s by-state fairness concerns can hurt both her and the retailer. The supplier’s profit decreases with demand variance, whereas the retailer’s expected profit is nonmonotone with it. When both supply chain agents care about by-state fairness, compared with the fairness-neutral case, the supplier’s profit decreases, whereas the retailer’s expected profit can either increase or decrease. The region where the retailer earns more will shrink in either the supplier’s disadvantageous inequality parameter or demand variance.