Fairness Ideals in Distribution Channels

Existing research suggests that concerns for fairness may significantly affect the interactions between firms in a distribution channel. We analytically and experimentally evaluate how firms make decisions in a two-stage dyadic channel, in which firms decide on investments in the first stage and then on prices in the second stage. We find that firms’ behavior differs significantly from the predictions of the standard economic model and is consistent with the existence of fairness concerns. Using a Quantal Response Equilibrium (QRE) model, in which both the manufacturer and retailer make noisy best responses, we show fairness significantly impacts channel pricing decisions. Additionally, we compare four principles of distributive fairness: strict egalitarianism, liberal egalitarianism, and libertarianism, previously considered in the fairness literature, and a new principle of distributive fairness  the sequence-aligned ideal that is studied first time in literature. Surprisingly, the new ideal, according to which the sequence of moving determines the formation of equitable payoff for players, significantly outperforms other fairness ideals.