An allocation game model with reciprocal behavior and its applications in supply chain pricing decisions

Commonly, people are much nicer in response to friendly actions and much nastier and even brutal in response to hostile actions. In social psychology, such a phenomenon is called reciprocity. As an extension of the standard Stackelberg game, we propose a new allocation game framework with consideration of such reciprocal behavior. Specifically, we consider a situation in which the follower evaluates the leaders intention based on the leaders action and then may take either a positive or negative reciprocal action. We also apply the new framework in a supply chain pricing problem to investigate the impact of the retailer’s reciprocal behavior on pricing decisions, obtaining the following interesting results. First, the supplier should take into account the retailers personality and offer a wholesale price based on it. Second, while the retailer can benefit from his reciprocal behavior, the supplier suffers in most cases. Finally, the retailers reciprocal behavior can help alleviate the double marginalization effect, and thus lead to a performance improvement in the whole supply chain.