Quality and Pricing Decisions in a Two-Echelon Supply Chain with Nash Bargaining Fairness Concerns

Product quality and pricing, as the important competitive tools, play a key role in attracting consumers. In a supply chain, the decisions on product quality and pricing are usually interlinked and would influence the cooperation relation between the members, especially when they are fairness-concerned and have different bargaining power. However, linking the quality and pricing decisions to the decision-makers’ behavioral factors such as fairness concern draws a little attention in the literature of supply chain management. This paper incorporates the members’ fairness preference and bargaining power into the product quality and pricing decisions in a two-echelon supply chain, where the supplier offers core components with a certain quality level to the downstream manufacturer, who subsequently sells the final products in the end market. Both the supplier and the manufacturer are assumed to be fairness-concerned by adopting Nash bargaining solutions as their fairness reference points. We use game-theoretic models to analyze the equilibrium product quality and pricing strategies under the setting of integrated and decentralized supply chain, respectively. Detailed comparisons and sensitivity analysis are further conducted to examine the impacts of members’ strengths of fairness concern, bargaining power, and decision structure on their equilibrium product quality and pricing strategies and corresponding payoffs.