European Journal of Operational Research 295 (2021) 140–156

Contents lists available at ScienceDirect

European Journal of Operational Research

journal homepage: www.elsevier.com/locate/ejor

Production, Manufacturing, Transportation and Logistics

Coordinating a closed loop supply chain with fairness concern by a

constant wholesale price contract
Sumit Sarkar∗, Shrey Bhala
XLRI – Xavier School of Management, Jamshedpur 831001, India

a r t i c l e i n f o a b s t r a c t

Article history: The literature on closed loop supply chains (CLSCs) has ignored advantageous inequality aversion while
Received 30 July 2020 modelling the fairness concern of channel partners and demonstrated that coordinating a decentralised
Accepted 23 February 2021
channel requires complex price contracts. In this paper, we show that a constant wholesale price contract
Available online 2 March 2021
can coordinate a decentralised channel in a manufacturer-led CLSC if the retailer’s advantageous inequal-
Keywords: ity aversion is sufficiently strong. The result is valid for a range of equitable shares of the channel profit,
Pricing such that the allocated share of the manufacturer is larger than that of the retailer, and the retailer’s
Channel coordination share is greater than a minimum threshold. Used product collection rate and channel profit are higher
Fairness when the retailer is inequality averse compared to when she is a profit maximiser. The results are inde-
Inequality aversion pendent of whether the end-of-use products are collected by the manufacturer or the retailer. We also
Wholesale price contract show that the collection rate is higher, and both channel partners are better-off, under the manufacturer
collection model. To obtain these results, we solve multistage sequential move games under the two col-
lection models. We apply Karush–Kuhn–Tucker conditions for constrained optimisation, to determine the
boundaries for the existence of the subgame perfect Nash equilibrium.
© 2021 Elsevier B.V. All rights reserved.

1. Introduction Two primary objectives of a CLSC are (a) maximising the

In closed loop supply chains (CLSCs), the end-of-use products
are collected from the market and sent upstream for remanufactur-
ing, via the reverse channel. The used products are collected from
the market either directly by the manufacturer (e.g. Xerox and
Hewlett Packard collect printer cartridges; Caterpillar’s ‘Cat Reman’
programme; Apple’s ‘Apple Trade In’ programme), the retailer (e.g.
Kodak and Fuji disposable cameras collected through retailers;
UK based consumer electronics retailer Currys PC World collects
used consumer durables), or a third party (e.g. in the automobile
industry, dismantlers are used for the collection of engines).
In a manufacturer collection model of CLSCs, the manufacturer
takes the initiative for collection and bears the cost of directly
collecting the end-of-use products from the market, whereas in
the retailer collection model (or third-party collection model), the
cost is borne by the collecting firm and the manufacturer buys
the used products for a collection fee (Savaskan, Bhattacharya &
Van Wassenhove, 2004). The cost of collection includes the cost
of building consumer awareness, prepaid shipping facility for the
consumers, and other forms of collection costs (e.g. maintaining
drop-off points).
collection rate and (b) maximising channel profit. The literature
on CLSCs has discussed the pros and cons of the collection
models, under varying conditions, and the implications for these
objectives. The literature has observed that these objectives are
best fulfilled in a centralised channel, followed by a decentralised
channel with retailer collection (Ma, Li & Wang, 2017; Savaskan
et al., 2004). Moreover, a constant wholesale price was observed
to not coordinate the decentralised channel (Choi, Li & Xu, 2013;
Savaskan & van Wassenhove, 2006). Complex pricing contracts,
for example, an extended two-part tariff, are required to achieve
channel coordination.
Notably, Cui, Raju and Zhang (2007) demonstrate that a con-
stant wholesale price can successfully coordinate a decentralised
channel in an open loop supply chain (OLSC)1 if the retailer is
concerned about fairness. Following Fehr and Schmidt (1999),
they model concern for distributive fairness in terms of inequality
aversion, accounting for both disadvantageous and advantageous
inequality. The utility of a fairness concerned player falls short
of their profit if there is a divergence between their realised
profit and what they consider their equitable payoff. They receive
disutility because of disadvantageous inequality (DI) when their

∗ 1
Corresponding author. In this paper, we refer to a supply chain with only a forward channel as an
E-mail addresses: sumits@xlri.ac.in (S. Sarkar), b19049@astra.xlri.ac.in (S. Bhala). OLSC.

https://doi.org/10.1016/j.ejor.2021.02.052
0377-2217/© 2021 Elsevier B.V. All rights reserved.
S. Sarkar and S. Bhala European Journal of Operational Research 295 (2021) 140–156

profit is less than their equitable payoff, as well as because of pricing in CLSCs and (ii) of channel efficiency and pricing under a
advantageous inequality (AI) when their profit is greater than their fairness concern.
equitable payoff.
Ma et al. (2017), the only study that have used non-cooperative
2.1. Channel efficiency and pricing in CLSC
game theory for resolving channel coordination in CLSCs with fair-
ness concerned partner(s), accounted only for disadvantageous in-
The pioneering research in this area has addressed the problem
equality aversion (DIA) and found that fairness concerns adversely
of channel coordination and efficiency in terms of the collection
affect channel coordination. This result is inconsistent with that in
rate of end-of-use products, as well as in terms of channel profit,
Cui et al. (2007) and other studies of the fair supply chain (Choi &
in manufacturer-led CLSCs, with one retailer (Savaskan et al.,
Messinger, 2016; Cui & Mallucci, 2016) that have considered both
2004) and under retailer competition (Savaskan & van Wassen-
DIA and advantageous inequality aversion (AIA) and found that
hove, 2006). In a comparison of three collection models, namely,
fairness concerns enhance channel efficiency. This inconsistency
the manufacturer collection model, the retailer collection model,
should be investigated to understand if there is a fundamental
and the third-party collection model, it was observed that retailer
difference between a CLSC and OLSC, such that in the presence
collection is the most efficient and that the channel could be
of fairness concerns, a CLSC cannot be coordinated by a constant
coordinated by improving retailer collection by using a two-part
wholesale price, although this is possible in an OLSC. Disregard for
tariff contract. However, under retailer competition, the manufac-
AIA, in the literature of CLSC, may also be a reason for this de-
turer collection model has been found to be more efficient unless
viance. In this paper, to address this issue, we develop a complete
the manufacturer sets a very high collection fee. Third-party
model of decentralised CLSC that considers both DIA and AIA.
collection may be more efficient than retailer collection under
There is experimental evidence for both types of inequality
diseconomies of scale in collection (Chuang, Wang & Zhao, 2014).
aversion among channel partners (Choi & Messinger, 2016; Cui &
Optimal pricing has been studied in the presence of a dual reverse
Mallucci, 2016; Niederhoff & Kouvelis, 2016). In the literature of
channel (Hosseini-Motlagh, Nouri-Harzvili, Choi & Ebrahimi, 2019;
fair OLSCs, both types of inequality aversion have been used to
Huang, Song, Lee & Ching, 2013) where the collection is performed
model the behaviour (Choi & Messinger, 2016; Cui et al., 2007; Du,
by the retailer and a third party. Intense collection competition
Nie, Chu & Yu, 2014; Zha, Wang, Liang & Zhou, 2016). A model
between the manufacturer, the retailer, and the third party does
of fair CLSC that ignores AIA remains incomplete and prone to a
not enhance collection efficiency (He, Wang, Yang, He & Jiang,
misleading conclusion. In this study, we attempt to bridge that
2019; Liu, Wang, Xu, Hong & Govindan, 2017a). Implications of
lacuna in the literature of CLSCs and answer the following research
competition between the original equipment manufacturer (OEM)
questions (Rs):
and remanufacturer (Bulmus, Zhu & Teunter, 2014; Wu, 2012,
R1: Does the concern of channel partner(s) for distributive 2015; Wu & Zhou, 2019), as well as of cooperation between them
fairness affect channel efficiency? (Chen & Chang, 2012), have been studied. Advertising and market-
R2: Is it possible to coordinate a decentralised CLSC with a ing efforts affect channel performance and collection rate (Hong,
constant wholesale price when the retailer is averse to both Xu, Du & Wang, 2015; Ma et al., 2017). Channel coordination has
types of inequality? also been studied under government policies of tax and subsidy
R3: Do the answers to R1 and R2 depend on the collection (Wan & Hong, 2019; Wang, Ding & Sun, 2018) and considering
model in the reverse channel? product greening (Chen & Akmalul’Ulya, 2019). Although most
R4: Which collection model is more efficient when the channel studies have modelled manufacturer-led Stackelberg games, Choi
partner(s) are concerned with distributive fairness? et al. (2013) consider different game structures with a third-party
collection, allowing for the leadership of the manufacturer, retailer,
Extending the work of Cui et al. (2007) to the domain of
and collector and found that the retailer-led model to be most
CLSC, we show that in a manufacturer-led dyadic CLSC, channel
efficient, although not coordinated.
efficiency increases due to the presence of an inequality averse
Apart from designing optimal pricing contracts for channel co-
retailer. Moreover, channel coordination can be achieved in a
ordination, revenue sharing has also been proposed in CLSCs with
decentralised CLSC by a constant wholesale price contract. These
corporate social responsibility (Panda, Modak & Cárdenas-Barrón,
results are independent of whether the end-of-use products are
2017) and considering the donation of used products (Wang et al.,
collected by the manufacturer or the retailer. However, collection
2019). Although the supplier has been mostly ignored in the mod-
rate, channel profit, manufacturer’s profit, and retailer’s utility are
els of CLSCs, Xiong, Zhou, Li, Chan and Xiong (2013) show that
all greater under manufacturer collection.
non-integrated manufacturers and their suppliers are worse off by
The rest of the paper is organised as follows. We discuss
remanufacturing, particularly under a high collection rate. Most
the relevant literature in Section 2. In Section 3, we define our
studies have focused on increasing collection efficiency while as-
problem statements and formulate the models. In Sections 4 and
suming that all collected end-of-use products could be refurbished.
5, we find the optimal solutions in the cases of the manufacturer
Teunter and Flapper (2011) account for the quality uncertainty of
collection model and retailer collection model, respectively. To
the used products to find the optimal collection rate.
understand the role of a fairness concern about efficiency, in each
of these sections, we compare the efficiency of the respective
model in the case where the retailer is inequality averse vis-à-vis 2.2. Channel efficiency and pricing under fairness concern
the case where the retailer is a profit maximiser. In Section 6, we
compare the two models and note the condition under which the Channel coordination and pricing have been studied under
results remain unaffected even if the manufacturer is also inequal- fairness considerations by considering other-regarding preferences,
ity averse. Finally, in Section 7, we discuss our contribution to the drawing upon the behavioural economics literature (Bolton &
literature and draw managerial implications based on our results. Ockenfels, 20 0 0; Fehr & Schmidt, 1999). While modelling fairness
concern in terms of inequality aversion, some studies ignored
2. Relevant literature AI (Katok & Pavlov, 2013; Liu, Zheng, Gong & Gui, 2017b; Qin,
Mai, Fry & Raturi, 2016; Wang, Yu & Shen, 2019) and found
In this section, we discuss two sets of literature that are that concern only for DI causes inefficiency. Zhang and Wang
relevant to our work: (i) the literature of channel efficiency and (2018) have studied the impact of vertical (distributive) and

141
S. Sarkar and S. Bhala
horizontal (peer-regarding) fairness concerns in a supply chain
with two manufacturers and one retailer but considered only DIA.
The studies that considered both types of inequality aversion
have observed that channel coordination and performance im-
prove under a fairness concern. Cui et al. (2007) have shown that
a dyadic forward channel comprising a manufacturer and a retailer
could be coordinated by a fixed wholesale price if the retailer has a
sufficiently strong inequality aversion. Caliskan-Demirag, Chen and
Li (2010) have obtained the same result under weaker conditions
by using a non-linear demand function. Both these papers have
accounted for DIA and AIA. In a closely related branch of research,
intention-based reciprocity has been observed to play a significant
role in price determination (Du et al.,2014; Sarkar, 2019). Du,
Wei, Zhu and Nie (2018) have observed that channel performance
improves in the presence of peer-regarding sympathy, which
is conceptually the same as AIA in the context of a horizontal
fairness concern. AIA has been observed in several experimental
studies. Choi and Messinger (2016) have noted that channel mem-
bers share profit more fairly than predicted in theoretical models
that ignore inequality aversion, which could be explained by the
presence of both types of inequality aversion. Niederhoff and Kou-
velis (2016) have found that a supplier’s choice of wholesale price
contracts is influenced by the concern for an equitable division
of profit. In addition to experimentally validating that both types
of inequality aversion exist, Cui and Mallucci (2016) have pointed
out that the notion of fairness depends on social norms and game
structure, with the latter having a more significant effect.
The fairness concern of the retailer in CLSCs has been exam-
ined in Ma et al. (2017), and they found that channel coordination
deteriorates because of DIA. Using the framework of cooperative
game theory, an optimal allocation for channel coordination has
been achieved based on the Shapley values of the channel partners
(Zheng, Liu, Li, Huang & Chen, 2019; Zheng, Li, Liu, Jia & Sheu,
2019), accounting for the retailer’s DIA. Notably, none of these
studies has considered the channel partner’s concern for AI. In this
paper, we make the first attempt to incorporate AIA.
3. Problem definition and model formulation
The notations used in this paper are presented in Table 1.
3.1. Problem definition
To study whether a constant wholesale price contract can suc-
cessfully coordinate a CLSC, in the presence of fairness concerns of
the channel partners, we consider two models of collecting end-
of-use products: (i) the manufacturer collection model (Model-M),
where the manufacturer (he) collects the used products from the
consumers, and (ii) the retailer collection model (Model-R), where
the collection is performed by the retailer (she). The forward
channel is identical in both the models. The manufacturer sells
the product to the retailer at the wholesale price, wi (i = m in
Model-M, and i = r in Model-R), and the retailer sells it at a retail
price pi in the market. The retail price determines the demand for
the product and follows the demand function:
D ( pi ) = A − b pi (3.1)
The potential market size A is the demand at the zero price,
and the demand sensitivity parameter b measures the sensitivity
of demand to price. A, b > 0.
In Model-M, the collection rate (Tm ) is determined by the
manufacturer, and the cost of collection is borne by him, whereas
in Model-R, the retailer is responsible for the collection of used
products. The collection rate (Tr ) is determined by the retailer, and
the cost of collection is borne by her. The collected end-of-use
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European Journal of Operational Research 295 (2021) 140–156
Table 1
Notations and their definitions.
Decision variables
w Wholesale price set by the manufacturer
p Retail price set by the retailer
T Collection rate of end-of-use products
ψ Collection fee provided to the retailer per unit
Outcome variables
S Total channel profit
 Manufacturer’s profit
π Retailer’s profit
U Retailer’s utility
Subscript indicating the collection model
i i = m, r, where m denotes the manufacturer collection model
(Model-M) and r denotes retailer collection model (Model-R)
Superscript indicating the nature of inequality
j j = D, A, where D denotes ‘DI’ and A denotes ‘AI’
Notations indicating equilibrium values
^ Used to indicate the equilibrium values in the case where the
retailer is a profit maximiser
∗
Used to indicate the equilibrium values in the case where the
retailer is inequality averse
Demand parameters
A Potential market size
b Demand sensitivity parameter
Cost parameters
c Manufacturer’s unit manufacturing cost
φ Manufacturer’s unit remanufacturing cost
δ Unit cost savings from remanufacturing (c − φ )
C Variable unit cost of collection
d Net reduction in average variable cost due to remanufacturing
(δ − C ), in Model-M.
μ Retailer’s unit profit from collection (ψ − C )
(d − μ ) Net reduction in average variable cost due to remanufacturing, in
Model-R.
B Scale parameter for fixed cost of collecting and handling
returned unit
Inequality aversion parameters
α Retailer’s DI parameter
β Retailer’s AI parameter
γ Retailer’s equitable payoff parameter
η Manufacturer’s equitable payoff parameter
products are then sold upwards in the channel to the manufac-
turer against a collection fee ψ per unit. Product flow in the two
models are presented in Fig. 1, and the timelines of the sequential
move game, under the two models, are presented in Fig. 2. Similar
collection models are used in Savaskan and Wassenhove (2006).
In each of these models, we solve the sequential move game and
determine the equilibrium retail price ( pi ), wholesale price (wi ),
and collection rate (Ti ). For each model, we consider the case
where the retailer is concerned about fairness and compare that
with the case where she is not.
This structure serves the following two objectives and helps us
answer our research questions (Section 1):
(1) Study whether the fairness concern of the retailer affects
channel efficiency
(2) Compare the effectiveness of the two models in terms of
channel efficiency.
There have been attempts to empirically estimate models,
where both the retailer and the manufacturer are concerned with
fairness. For example, Cui and Mallucci (2016) reports that both DI
and AI coefficients were found to be insignificant in one of their
studies. In view of this we develop the model considering only
the retailer’s inequality aversion. However, in Section 6.1, we show
that the equilibrium of the game remains the same if both part-
ners are fairness concerned and have a common understanding of
equitable shares of the channel profit.
S. Sarkar and S. Bhala
Fig. 1. Collection models.
Fig. 2. Game timelines.
3.2. Assumptions
Assumption 1. Demand for the manufacturer’s product remains
unchanged across generations of the product.
During the production of the current generation product, the
manufacturer collects a fraction of the end-of-use products of
the previous generation and uses them in remanufacturing. The
assumption of demand remaining unchanged over generations
allows us to avoid the complexity of intertemporal dynamics.
Assumption 2. Manufacturing and remanufacturing costs are lin-
ear in quantity produced.
This assumption is common in the literature (Savaskan &
Wassenhove 2006, Cui et al., 2007, Choi et al., 2013). Such a linear
cost function is generated due to the existence of constant returns
to scale in the production. A sufficiently automated production
process, as is the case in manufacturing, exhibits constant returns
to scale because inputs are used in fixed proportions.
Assumption 3. φ < c
This means the cost of remanufacturing is less than the cost of
manufacturing.
Assumption 4. 0 < Ti < 1, i = m, r
The collection rate is the same as the return rate of used
previous generation products. When there is no collection, Ti = 0,
and when the previous generation products are all collected,
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European Journal of Operational Research 295 (2021) 140–156
Ti = 1. Because we analyse a CLSC, we rule out the possibility
of no collection. On the other extreme, recollecting all previous
generation products is unrealistic. Hence, the collection rate is a
fraction. The collection rate depends on the promotional effort of
the collection agent.
Assumption 5. Remanufactured products and manufactured prod-
ucts are identical.
Assumptions 3–5 were used in both Savaskan and Wassenhove
(2006) and Choi et al. (2013).
Assumption 6. C < δ
The variable collection cost C is less than the unit cost savings
δ and is a necessary condition for remanufacturing to be econom-
ically viable. This assumption was also used in Choi et al. (2013).
Assumption 7. α > β > 0
This assumption means that the inequality averse player
suffers higher disutility because of DI, compared to AI. This as-
sumption is from Fehr and Schmidt (1999) and is also used in
Cui et al. (2007).
Assumption 8. There is no information asymmetry, and the
players—in this case, the retailer and the manufacturers—have per-
fect foresight and perfect recall.
This assumption allows us to solve the game under complete
and perfect information. Although this assumption is common,
most authors do not state it explicitly.
S. Sarkar and S. Bhala European Journal of Operational Research 295 (2021) 140–156

3.3. Costs, revenues, and profits of manufacturers and the retailer is greater than what she deems she deserved, she experiences
disutility due to guilt. The retailer’s utility function is
The costs and revenues differ in the two collection models.
Hence, we outline the costs, revenues, and profits in Model-M and Ui = πi − α max {(γ i − πi ), 0} − β max {(πi − γ i ), 0}
in Model-R separately. (3.6)

3.3.1. Costs, revenues, and profits in Model-M Based on Assumption 7, α > β > 0.
The manufacturer’s collection rate is Tm , that is, Tm fraction of We assume that α , β , and γ are known to the manufacturer.
products sold in the market is collected at the end of their lifecycle Addressing the information asymmetry regarding these inequality
and used in remanufacturing. In other words, the Tm fraction of the aversion parameters is not within the scope of this paper. In the
current generation products is produced through remanufacturing, literature (e.g. Choi & Messinger, 2016; Cui et al., 2007; Du et al.,
utilising the end-of-use products of the previous generation. The 2014; Ma et al., 2017; Zha et al., 2016) a common assumption is
total cost of collection is Tm D( pm )C + BTm2 , where C is the unit complete information, and this helps us focus on the core issue
variable cost and BTm2 is the fixed cost of collecting used products. of how fairness concern affects efficiency. The assumption of com-
In this case, the fixed cost is a function of the collection rate and B plete information is justified in the light of the empirical evidence
is the scale parameter. A similar collection cost function was used that individuals and businesses accept a commonly held standard
in Savaskan and Wassenhove (2006) and Choi et al. (2013). Because for equitable distribution (Falk & Fischbacher, 2006; Kahneman,
the unit cost of remanufacturing is φ , and the Tm fraction of the Knetsch & Thaler, 1986; Loewenstein, Thompson & Bazerman,
demand is produced through remanufacturing, the remanufactur- 1989), and inequality is felt when there is a deviation from this
ing cost is Tm D( pm )φ . The remaining (1 − Tm ) fraction of products common standard.
is manufactured at a unit cost of c. Therefore, the total cost of the
manufacturer is (1 − Tm )D( pm )c + Tm D( pm )φ + Tm D( pm )C + BTm2 .
4. Optimal solutions in Model-M
Each unit is sold at the wholesale price wm . Therefore, the manu-
facturer’s revenue is D( pm )wm . Substituting D( pm ) from (3.1) and
In this section, we find the subgame perfect Nash equilibrium
(c − φ − C ) = d, the manufacturer’s profit function is (henceforth, subgame perfect equilibrium, or equilibrium) of the
m = (A − b pm )[wm − c + dTm ] − BTm2 (3.2) game under Model-M. First, we solve the game by considering
the retailer to be a profit maximiser and then considering her to
The retailer buys the product for wm per unit and sells at pm
be inequality averse. To find the equilibrium, we solve the game
per unit; hence, the retailer’s profit function is
backwards. In Stage 3 of the game, the manufacturer chooses the
πm = ( A − b p m ) ( p m − w m ) (3.3) collection rate, Tm , that maximises his profit, m , given in (3.2),
that is, he solves the following problem:
3.3.2. Costs, revenues, and profits in Model-R
max m = (A − b pm )[wm − c + dTm ] − BTm2
In Model-R, the retailer bears the cost of collection and 0≤Tm ≤1
sells the end-of-use products to the manufacturer for a col-
lection fee ψ per unit, determined by the manufacturer. Her By solving that we obtain
collection rate is Tr . Therefore, the total cost of the manu-
⎧
⎨(
⎪ A − b pm )d Ad − 2B
facturer is (1 − Tr )D( pr )c + Tr D( pr )(ψ + φ ). The manufac- i f, pm >
2B bd
turer’s revenue is D( pr )wr . Substituting D( pr ) from (3.1) and Tm =
⎪
⎩1 Ad − 2B
(δ − ψ ) = (δ − C ) − (ψ − C ) = (d − μ ), her profit function is i f, pm ≤
bd
r = (A − b pr )[wr − c + (d − μ )Tr ] (3.4)
Based on Assumption 4, 0 < Tm < 1; hence,
The retailer’s collection cost is D( pr )TrC + BTr2 .
The col-
( A − b p m )d
lection rate is the only difference in the collection cost in this Tm = (4.1)
model vis-à-vis the Model-M. The retailer buys the products 2B
at the wholesale price wr ; hence, the retailer’s total cost is Therefore, we impose a constraint on pm that pm > Ad−2 B
.
bd
D( pr )wr + D( pr )TrC + BTr2 . The retailer has two sources of Because the manufacturer chooses Tm in Stage 3, (4.1) remains
revenue: the sale of final products and the collection of used valid irrespective of whether the retailer is fairness concerned.
products. Therefore, the retailer’s revenue is D( pr ) pr + D( pr )Tr ψ .
Because (ψ − C ) = μ, the retailer’s profit function is
4.1. Model-M with a profit-maximising retailer
πr = (A − b pr )[ pr − wr + μTr ] − BTr2 (3.5)
Given any wholesale price, wm , chosen by the manufacturer
3.4. Retailer’s inequality aversion in Stage 1, and anticipating that he will choose Tm by follow-
ing (4.1) in Stage 3, the retailer chooses the retail price, pm , in
In our model, the retailer has fairness concerns. Hence, she will Stage 2 to maximise her profit, πm , given in (3.3), subject to
maximise her utility which accounts for her monetary payoff and Ad−2B
< pm < Ab . We solve the retailer’s optimisation problem by
bd
her aversion towards inequality. Following Cui et al. (2007), we applying the Karush–Kuhn–Tucker (K–K–T) conditions (Boltyanski,
specify that the retailer’s ‘equitable payoff’ is the profit that she Martini & Soltan, 2013) for constrained optimisation. By solving
perceives as deserving relative to the manufacturer’s profit. The that problem, we obtain pm = A+2bbwm if Ad−4
bd
B
< wm < Ab and only
equitable profit of the retailer is γ m , where γ (> 0 ) is the equi-
if bd8 < B < (A−bc )d
2
4 . Anticipating the retailer’s choice in the down-
table payoff parameter of the retailer. In other words, the equitable
stream, the manufacturer chooses wm in Stage 1 of the game to
share of the retailer is the γ /(1 + γ ) share of the channel profit.
maximise his profit, m . Solving, we obtain
Any deviation from the equitable payoff incites disutility for the
retailer. In the case of DI, namely, when her profit is smaller than 4B(A + bc ) − Abd2 d (A − bc ) + bd2 (A − bc )d
her equitable payoff, she suffers disutility due to disappointment. ˆm =
w if <B<
8bB − b d2 2 8 4
On the other hand, in the case of AI, namely, when her profit

144
S. Sarkar and S. Bhala European Journal of Operational Research 295 (2021) 140–156

Substituting, we obtain the equilibrium values of the decision By applying the K–K–T conditions and solving, we obtain the
variables: optimal retail price when the retailer experiences DI:
4B(A + bc ) − Abd2
 
ˆm =
w 2AB(1 + α ) + αγ b Ad2 − 2Bc + 2bB(1 + α + αγ )wm
8bB − b2 d2 pm =
b[4B(1 + α ) + bd2 αγ ]
2B(3A + bc ) − Abd2
pˆ m = A + bcγ
8bB − b2 d2 if wDm ≤ wm < (4.2)
b + bγ
(A − bc )d
Tˆ m = 4AB+4ABα +8bBcγ −Abd2 γ +4bBcαγ +Abd2 αγ +b2 cd2 αγ 2
8B − bd2 where wD
m = 4bB+4bBα +8bBγ −b2 d2 γ +4bBαγ +b2 d2 αγ +b2 d2 αγ 2
.
A+bcγ
Notably, wm < b+bγ is required for DI at the maximum pos-
In the equilibrium, the manufacturer’s, retailer’s, and the
A+bcγ
channel’s profits are, sible retail price. wm < b+bγ implies γ (wm − c ) < ( Ab − wm ); in
2 which case, there is DI even at pm = A/b.
ˆ m = B(A − bc ) 
 The retailer experiences AI if and only if πm > γ m that is if
b 8B − bd2 4B (1+γ )wm +γ (Ad2 −4Bc )
2
pm > 4B+γ bd2
. Her optimisation problem is
4B (A − bc )
2
πˆ m =  2 max (A − b pm )( pm − wm )
b 8B − bd2 
  (A − b pm )d2
− β ( A − b pm ) ( pm − wm ) − γ
2
B(A − bc ) 12B − bd2 wm − c +
Sˆm =  2 2B
b 8B − bd2 2
( A − b p m )d
+γB
2B
4.2. Model-M with an inequality averse retailer
4B(1 + γ )wm + γ (Ad2 − 4Bc ) A
Now, we find the subgame perfect equilibrium of the game by s.t. < pm <
4B + γ bd2 b
considering that the retailer is an inequality averse utility max- By applying the K–K–T conditions and solving, we obtain the
imiser. The manufacturer’s choice of Tm in Stage 3 follows (4.1). optimal retail price when the retailer experiences AI:
 
4.2.1. Optimal retail price in Model-M with an inequality averse 2AB(1 − β ) − βγ b Ad2 − 2Bc + 2bB(1 − β − βγ )wm
pm =
retailer b[4B(1 − β ) − bd2 βγ ]
We anticipate that for any wm chosen by the manufacturer
if c < wm ≤ wAm (4.3)
in Stage 1, the inequality averse retailer chooses the retail price,
pm , in Stage 2 to maximise her utility, Um , given in (3.6). The 4AB−4ABβ +8bBcγ −Abd2 γ −4bBcβγ −Abd2 βγ −b2 cd2 βγ 2
where wAm = 4bB−4bBβ +8bBγ −b2 d2 γ −4bBβγ −b2 d2 βγ −b2 d2 βγ 2
.
retailer either experiences DI because of receiving a profit that is
The retailer does not experience any form of inequality if and
smaller than her equitable payoff, or she experiences AI because of
only if πm = γ m that is if
receiving a profit that is greater than her equitable payoff, or she  
does not experience inequality because of receiving her equitable 4B(1 + γ )wm + γ Ad2 − 4Bc
pm = , (4.4)
payoff. We determine the retailer’s optimal decision, conditional 4B + γ bd2
on each of these cases.
The retailer experiences DI if and only if πm < γ m , that is if which occurs only if wAm < wm < wD
m.
4B (1+γ )wm +γ (Ad2 −4Bc )
pm < 4B+γ bd2
. Her optimisation problem is

max (A − b pm )( pm − wm )
 4.2.2. Optimal wholesale price and channel coordination in Model-M
(A − b pm )d2 with an inequality averse retailer
−α (A − b pm ) γ wm − c + − ( pm − wm )
2B Anticipating the retail price, pm , the manufacturer chooses the
2 optimal wholesale price, wm , in Stage 1.
(A − b pm )d If wD
A+bcγ
−γ B m ≤ wm < b+bγ
, by substituting Tm from (4.1) and pm
2B from (4.2) in the manufacturer’s profit function given in (3.2), his
optimisation problem is
Ad − 2B 4B ( 1 + γ )wm + γ ( Ad 2 − 4Bc )
s.t. < pm <
bd 4B + γ bd2
⎧  
⎪ B[A(1 + α ) + bcαγ − bwm (1 + α + αγ )] 8B(wm − c )(1 + α ) + d2 [A(1 + α ) − bwm {1 + α (1 − γ )} − bcαγ ]
⎪
⎨max
[4B(1 + α ) + bd2 αγ ]
2
(4.5)
⎪
⎩s.t., wDm ≤ wm < A + bcγ
⎪
b + bγ

Similarly, if c < wm ≤ wAm , by substituting Tm from (4.1) and pm

from (4.3) in the manufacturer’s profit function provided in (3.2),
his optimisation problem is
⎧  
⎨max B[A(1 − β ) − bcβγ − bwm (1 − β − βγ )] 8B(wm − c )(1 − β ) + d [A(1 − β ) − bwm {1 − β (1 − γ )} + bcβγ ]
⎪ 2

[4B(1 − β ) − bd2 βγ ]
2
(4.6)
⎪
⎩
s.t., c < wm ≤ wm
A

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S. Sarkar and S. Bhala European Journal of Operational Research 295 (2021) 140–156

Since ∗m = Sm∗ / (1 + γ ) and π ∗ = γ S∗ / (1 + γ ), the channel is

m m
If wAm < wm < wD m , by substituting Tm from (4.1) and pm coordinated by a constant wholesale price, w∗m , in the presence of
from (4.4) in the manufacturer’s profit function, his optimisation a fairness concerned retailer, who receives disutility from both DI
problem is and AI.
⎧  
⎨max 4B 4B(wm − c ) + d (A − bwm ) [A − b{wm (1 + γ ) − cγ }]
⎪ 2

2 4.3. Channel efficiency of Model-M – profit-maximising v. inequality

4B + bd2 γ
⎪
⎩ averse retailer
s.t., wm < wm < wm
A D

(4.7) In Fig. 3, we have plotted the channel profit, manufacturer’s

By solving each of these optimisation problems and comparing
the resulting profits, the manufacturer can determine his glob-
ally optimal wm . After solving the manufacturer’s optimisation
problem, we arrive at Proposition 1.
Proposition 1. If β> 1
> 1
and B ≥ BA1 ,
1+γ 2
2dγ (A−bc )+bd2 γ (1+β +βγ )
4(1−β −βγ )+8γ
, the manufacturer’s globally optimal whole-
sale price, w∗m , is such that wAm < w∗m < wD
m . The wholesale price,
w∗m , that maximises the manufacturer’s profit in Model-M also
maximises the channel’s profit.
The proof is provided in Appendix 1.
Proposition 1 holds true if B, which is the scale parameter for
the fixed cost of collecting and handling returned units, reaches
a threshold. The condition 1+1γ > 12 implies that γ < 1, i.e., the
retailer’s equitable payoff is less than the manufacturer’s profit.
Under these parametric conditions, the wholesale price that
maximises the manufacturer’s profit successfully coordinates the
channel if the retailer’s AI parameter is sufficiently large. This
result underscores the role of AIA in channel coordination. The
result cannot be obtained if the AIA is ignored, as has been done
in the existing literature on CLSC coordination in the presence of
fairness concerns. If the retailer perceives only DI, for any given
wholesale price, she chooses the retail price such that her profit
increases and the manufacturer’s profit decreases. The presence of
AIA in the retailer’s utility function enables her to choose a retail
price that equates her profit and her equitable payoff, which is a
fraction of the manufacturer’s profit, and in turn, neutralises the
distortion brought in by her DIA.
By substituting w∗m in (4.4), we obtain the equilibrium retail
price, p∗m , and by substituting w∗m and p∗m in (4.1) we obtain T∗m .
The equilibrium values of the decision variables are
   
A 4B − bd (2 + γ ) − bc 4B(1 + 2γ ) − bd2 γ
2
∗
wm =  
2b 4B − bd2 (1 + γ )
profit, and the retailer’s profit as functions of the wholesale price
for the following parameter values. A = 360, b = 5, c = 20, C = 10,
φ = 5, δ = (c − φ ) = 15, d = (δ − C ) = 5, α = 1, β = 0.8, and γ = 0.7.
These parameter values satisfy the parameter conditions provided
in Proposition 1. To compare the channel profit, manufacturer’s
where BA1 = profit, and the retailer’s profit with the case where the retailer is
a profit maximiser, we have also plotted the corresponding profit
functions in the same Cartesian plane. Notably, these parameter
values satisfy the condition B > (A−bc )8d+bd , which was required in
2
the determination of ˆ m , πˆ m , and Sˆm .
Note that in the presence of a retailer, who is concerned with
both AI and DI, the channel profit, as well as the retailer’s profit,
is maximized at the wholesale price w∗m , which maximises the
manufacturer’s profit. Fig. 3 also shows that such channel coordi-
nation with a fixed wholesale price contract is not possible if the
channel partners are profit maximisers. With profit maximising
partners, retailer’s profit and the channel profit decrease, while
the manufacturer’s profit increases, as the wholesale price in-
creases. Moreover, the figure clearly shows that the channel profit
is higher if the retailer is fairness concerned, vis-à-vis if she is a
profit maximiser, if the wholesale price is between wAm and wD m.
The retailer does not perceive inequality within this range of the
wholesale price, and notably, w∗m falls within this range.
Comparing the profits and the collection rate in the case where
the retailer is inequality averse, vis-à-vis where she is not, we
arrive at Proposition 2.
Proposition 2. In Model-M, compared to the case where the retailer
is a profit maximiser, the channel is more efficient in terms of
collection rate and channel profit, and the manufacturer’s profit is
greater when the retailer is inequality averse, and if β > 1+1γ > 12
2dγ (A−bc )+bd 2 γ (1+β +βγ )
and B ≥ 4(1−β −βγ )+8γ
.
The retailer also earns a greater profit being inequality averse
if γ is greater than a threshold γm .

2B(A + Bc ) − Abd2 The value of γm appears in the proof, which is provided in

p∗m = Appendix 1.
4bB − b2 d2
Proposition 2 holds if γ < 1, where γ is the retailer’s equitable
(A − bc )d payoff parameter. When γ < 1, the retailer’s equitable share is
T∗m = less than that of the manufacturer. Proposition 2 shows that the
4B − bd2
manufacturer is better-off and the channel is more efficient if the
In the equilibrium, the manufacturer’s, retailer’s, and channel’s retailer is strongly inequality averse and her equitable share is less
profit is than that of the manufacturer, compared to the situation where
B(A − bc )
2 the retailer is a profit maximiser. A fairness concerned retailer
∗m =   is also better-off than a profit maximising one if the retailer’s
b 4B − bd2 (1 + γ ) equitable payoff parameter exceeds the threshold, γm . However, if
γ ≤ γm , that is if the equitable share of the retailer is too small,
γ B(A − bc )2
πm∗ =   then the retailer is disincentivised to be averse to AI and is better-
b 4B − bd2 (1 + γ ) off not being concerned about fairness. For the parameter values
used in the aforementioned example, γm = 0.332. A comparison
of πm ∗ and π ˆ m shows that πm ∗ >π
2
B(A − bc ) ˆ m for any parameter values
∗
Sm =   if γ ≥ 1/3. In other words, if by the common understanding of
b 4B − bd2
equitable distribution the retailer’s equitable share, γ /(1 + γ ),
Because there is no inequality in the equilibrium, the retailer’s is at least one-fourth of the channel profit, an inequality averse
utility is the same as her profit. retailer is better-off than a profit maximiser.

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S. Sarkar and S. Bhala European Journal of Operational Research 295 (2021) 140–156

Fig. 3. Optimal wholesale price in Model-M.

5. Optimal solutions in Model-R In Stage 1, the manufacturer chooses wr to maximise r . By

solving we obtain
In this section, we investigate if the results derived in
16B(A + bc ) − 3Abd2 − b2 cd2
Section 4 for Model-M hold for Model-R, wherein the collection of ˆr =
w if
used products is undertaken by the retailer for a fee. In this case,
32bB − 4b2 d2
the cost of collection is borne by the retailer. The timeline of the d (A − bc ) + bd 2
4d (A − bc ) + bd2
<B<
game is shown in Fig. 2. As we have done for Model-M, in this 8 16
case also we solve the game by first assuming that the retailer is a Substituting, we obtain the following values of the decision
profit maximiser and then assuming that she is inequality averse. variables:
16B(A + bc ) − 3Abd2 − b2 cd2
ˆr =
w
5.1. Model-R with a profit-maximising retailer 32bB − 4b2 d2

In Stage 4, the retailer chooses the collection rate,Tr , to 2B(3A + bc ) − Abd2

pˆ r =
maximise her profit, πr , given in (3.5); thus the optimal Tr is 8bB − b2 d2
determined:
(A − bc )d
(A − b pr )μ Tˆ r =  
Tr = (5.1) 2 8B − bd2
2B
In equilibrium, the manufacturer’s, retailer’s, and the channel’s
Model-R is economically viable for the manufacturer only if
profits are,
μ < d. In Stage 3, the manufacturer chooses the collection fee, μ,
to maximise his profit, r , given in (3.4); thus, the optimal μ is 2
ˆ r = B(A − bc ) 

determined as b 8B − bd2
d  
μ= (5.2) B 16B − bd2 (A − bc )
2
2 πˆ r =  2
By substituting (5.2) in (5.1), we obtain, 4b 8B − bd2
 
(A − b pr )d 2
B(A − bc ) 48B − 5bd2
Tr = (5.3) Sˆr =
4B  2
4b 8B − bd2
Ad−4B
Because by Assumption 4 0 < Tr < 1, we obtain pr > bd
.
By substituting (5.2) and (5.3) in the retailer’s profit function A comparison between πˆ r and πˆ m shows that a profit-
(3.5), and maximising πr subject to Ad−4bd
B
< pr < Ab , applying the maximising retailer is worse off in Model-R than in Model-M. By
K–K–T conditions, we obtain contrast,  ˆr= ˆ m , namely, the manufacturer obtains the same
  profit in Model-R and Model-M, when the retailer is a profit
A 8B − bd2 + 8bBwr 4Ad − 16B + bd2 A maximiser. Therefore, Model-R is not Pareto optimal if the channel
pr = if ≤ wr <
16bB − b2 d2 4bd b partners are profit maximisers. Moreover, when the channel part-
bd2 4d (A − bc ) + bd2 ners are profit maximisers, Model-R is inefficient because Sˆr < Sˆm
and only if <B< and Tˆ r < Tˆ m . Hence, we arrive at Corollary 1:
16 16
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S. Sarkar and S. Bhala European Journal of Operational Research 295 (2021) 140–156

Corollary 1. When the channel partners are profit maximisers, they Because there is no inequality in the equilibrium, the retailer’s
reject Model-R in favour of Model-M. utility is the same as her profit.
Next, we check if Model-R would be preferred when the Since ∗r = Sr∗ /(1 + γ ) and πr∗ = γ Sr∗ /(1 + γ ), in Model-R, the
retailer is inequality averse. channel is coordinated by a constant wholesale price, w∗r , in the
presence of a fairness concerned retailer. In Section 4, we have
5.2. Model-R with an inequality averse retailer proven that in Model-M, the manufacturer’s profit-maximising
wholesale price achieves channel coordination in the presence of
If the retailer is inequality averse, she chooses the collection a fairness concerned retailer, who receives disutility from both DI
rate,Tr , in Stage 4, and the retail price, pr , in Stage 2 to maximise and AI. Replication of the same result in Model-R shows that the
her utility, Ur , given in (3.6). We first find the optimal retail price result is independent of the collection model.
under DI, AI, and no inequality, respectively, and then find the
globally optimal wholesale price to determine the subgame perfect
equilibrium of the game. Derivation of the optimal retail prices
and determination of the manufacturer’s optimization problem 5.3. Channel efficiency of Model-R – profit-maximising v. inequality
in Stage 1 of the game is technically similar to that done for averse retailer
Model-M in Section 4.2. The detailed derivations are given in
Appendix 2 for the benefit of the interested readers. In Fig. 4, which is the Model-R equivalent of Fig. 3, we have
By solving the optimisation problems of the manufacturer and plotted the channel profit, manufacturer’s profit, and retailer’s
comparing the resulting profits, we determine the globally optimal profit as functions of the wholesale price for the same parameter
wr and thus obtain Proposition 3. values used in Section 4.3. These parameter values satisfy the set
of conditions (ii) provided in Proposition 3. Fig. 4 shows that in
Proposition 3. The manufacturer’s globally optimal wholesale price, the presence of a fair retailer the channel profit and the retailer’s
w∗r , is such that wAr < wr < wDr , if either of the following sets of profit are maximized at the wholesale price w∗r , that maximises
conditions holds, along with γ < 1; the manufacturer’s profit. The figure also shows that the channel
3bd2
profit is higher if the retailer is fairness concerned, compared to
(i) 2
2+3γ +γ 2
≤β < 1
1+γ , and 16 <B<B when she is a profit maximiser, if the wholesale price is between
bd2 wAr and wD
1+γ ≤ β max{ 316 , B} r . For this range of the wholesale price, under Model-R,
1
(ii) < 1, and B ≥
the retailer does not perceive inequality. Notably, the optimal
where wholesale price, w∗r , falls within this range.
bd2 [4Aγ (1 − β − βγ − 2γ ) − 4bcγ (1 − β − βγ − 2γ ) − bd (1 + γ ){1 + 4γ + β 2 (1 + γ ) − 2β (1 + 3γ + 2γ 2 )}]
2
B=
16(1 − β − βγ )[4Aγ − 4bcγ − bd (1 + γ )(1 − β − βγ + 2γ )]

The wholesale price, w∗r , that maximises the manufacturer’s

profit in Model-R also maximises the channel’s profit.

The proof is provided in Appendix 2. Comparing the outcome variables in the case where the retailer
In Model-R, as in Model-M, the wholesale price that maximises is inequality averse, vis-à-vis where she is a profit maximiser, we
the manufacturer’s profit also maximise the channel profit if the arrive at Proposition 4.
retailer is sufficiently averse to AI. Proposition 3 again highlights
the importance of the AI parameter, β , in neutralising the distor- Proposition 4. In Model-R, compared to the case where the retailer
tionary effect of DIA and in enabling channel coordination through is a profit maximiser, the channel is more efficient in terms of
a fixed wholesale price contract. collection rate and channel profit, and the manufacturer’s profit is
By substituting w∗r in (5.12), we obtain the equilibrium retail greater when the retailer is inequality averse and either of the sets of
price p∗r , and by substituting w∗r and p∗r in (5.3), we obtain T∗r . The conditions provided in Proposition 3, along with γ < 1, hold.
equilibrium values of the decision variables are The retailer also earns a greater profit being inequality averse
    if γ is greater than a threshold γr .
A 16B − bd2 (5 + 2γ ) +bc 16B(1 + 2γ ) − bd2 (1 + 4γ )
w∗r =  
2b 16B − 3bd2 (1 + γ ) The value of γr appears in the proof, which is provided in
Appendix 2.
8B(A + bc ) − 3Abd 2
In Proposition 4, we have replicated the essential results
p∗r =
16bB − 3b2 d2 summarised in Proposition 2. Thus, when the retailer is strongly
inequality averse, in Model-R, as in Model-M, the manufacturer is
2(A − bc )d better-off and the channel is more efficient compared to when she
T∗r =
16B − 3bd2 is a profit maximiser. The retailer is also better-off if γr < γ < 1,
that is, her equitable payoff parameter is greater than a threshold
In the equilibrium, the manufacturer’s, retailer’s, and the
even though it is smaller than that of the manufacturer. However,
channel’s profits are
as in Model-M, the retailer is worse-off being fairness concerned
4B(A − bc )
2
if γ ≤ γr because a very small equitable share disincentivises her
∗r =   from being averse to AI. For the parameter values used in the
b 16B − 3bd2 (1 + γ )
above example, γr = 0.332. A comparison between πr∗ and πˆ r
shows that πr∗ > πˆ r for any parameter values if γ ≥ 1/3. Therefore,
γ 4B(A − bc )2
πr∗ =   the retailer is better-off being inequality averse if the retailer’s
b 16B − 3bd2 (1 + γ ) equitable share, γ /(1 + γ ), is at least one-fourth of the channel
profit. The requirement γ < 1 is satisfied if the retailer’s equitable
2
4B(A − bc ) share is less than that of the manufacturer. We compare the
Sr∗ =  
b 16B − 3bd2 efficiency of the two models in Section 6.

148
S. Sarkar and S. Bhala
Fig. 4. Optimal wholesale price in Model-R.
6. Comparative efficiency of Model-M and Model-R
If the equitable payoff parameter, γ , is too low, specifically,
if γ ≤ min{γm , γr }, the retailer is better-off by maximising her
profit. In such a case, as shown in Section 5.1, the retailer rejects
Model-R in favour of Model-M. That is, if the retailer’s equitable
share of the channel profit is very low, she will not be concerned
with fairness and will not agree to be responsible for the collection
of used products. In contrast, if γ is not too low, an inequality
averse retailer is better-off than a profit maximising one. As
max{γm , γr } < 1/3, the retailer’s profit under inequality aversion
is greater than her profit under profit maximisation for all values
of γ ≥ 1/3, that is if the retailer’s equitable share, γ /(1 + γ ), is at
least one-fourth of the channel profit. We compare the efficiency
of the two models under this condition and determine which
model will be preferred by the channel partners. This comparison
is valid under a parameter condition such that {w∗m , p∗m , T∗m }
constitute the subgame perfect equilibrium in Model-M and
{w∗r , p∗r , T∗r } constitute the same in Model-R. By Propositions 1
and 3, β > 1/(1 + γ ) > 1/2 and B ≥ max{BA1 , 3bd2 /16, B} constitute
such a parameter condition. Comparing the equilibrium profits
and collection rates in the two models, we arrive at Proposition 5.
3bd2
Proposition 5. If β > 1+1γ > 12 , and B ≥ max{BA1 , 16 , B}, Model-M
is more efficient than Model-R.
Proof. of Proposition 5:
2 bd2 bd2
T∗r ≥ T∗m only if B ≤ bd8 < 316 . Because B > 316 is a necessary
∗ ∗
condition, Tr ≥ Tm .
∗ and S∗ , shows that S∗ < S∗ as b > 0.
A comparison between Sm r r m
Thus, the collection rate and channel profit are higher in
Model-M.
Since ∗r = Sr∗ /(1 + γ ), and ∗m = Sm ∗ / ( 1 + γ ), we ob-
tain r < m . Similarly, because πr = γ Sr∗ /(1 + γ ) and
∗ ∗ ∗
πm∗ = γ Sm∗ / (1 + γ ), it implies that π ∗ < π ∗ .
r m
Both channel partners are better-off in Model-M.
In a channel where the retailer’s equitable share and her
AI parameter are not too low, an inequality averse retailer is
European Journal of Operational Research 295 (2021) 140–156
better-off than a profit maximising retailer. A constant wholesale
price contract coordinates such a channel due to the retailer’s AIA,
irrespective of whether the manufacturer collects the used items,
or the retailer does. However, Model-R is not Pareto optimal and
hence, the partners agree on Model-M. The efficiency of Model-M
stems from the structure of the game. In Model-M the manufac-
turer decides the collection rate in Stage 3, whereas in Model-R
the manufacturer decides the collection fee in Stage 3 anticipating
the collection rate that the retailer will select in Stage 4. Hence, in
Model-M, the manufacturer controls the collection rate directly. In
contrast, the retailer decides the collection rate in Model-R while
the manufacturer tries to control it indirectly by determining
the optimal collection fee in the preceding stage of the game.
Consequently, the manufacturer can better optimise in Model-M,
vis-à-vis in Model-R, and thus can choose a more efficient whole-
sale price in Stage 1. This is a completely new insight as there is
no existing study of fair CLSC that compared ‘manufacturer col-
lection’ with ‘retailer collection’ solving the multi-stage sequential
move game between the partners of a decentralised channel.
6.1. Equilibrium with inequality averse manufacturer
In this paper, we have assumed that the manufacturer is a
profit maximiser. A complete derivation of the subgame perfect
equilibrium, under Model-M and Model-R, considering inequality
aversion of both the retailer and the manufacturer, is beyond the
scope of this paper. Only Han, Feng and Pu (2015) considered both
partners to be inequality averse. However, they used a quantal re-
sponse equilibrium (QRE) model, instead of attempting to find the
subgame perfect equilibrium of the sequential move game. None
of the papers on channel coordination in the presence of fairness
concerns attempted to solve the multi-stage sequential move game
between the channel partners accounting for both DIA and AIA
of both the partners. Incorporation of both the partners’ DIA and
AIA, from the beginning, generates too many cases. In a given

scenario, each partner can either perceive DI, or AI, or perceive
no inequality. If both the manufacturer and retailer are inequality
averse, then nine scenarios are generated for each of the collection
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S. Sarkar and S. Bhala
models, and that makes the optimisation exercise cumbersome.
To streamline our analysis, we now consider if the equilibria, and
consequently, our main results summarised in Propositions 2, 4,
and 5, are affected due to the manufacturer’s inequality aversion. A
similar approach has been adopted in Cui et al. (2007) to address
the possibility of inequality aversion by both the channel partners.
If the manufacturer is inequality averse, his utility function
accounts for his profit and his disutility due to the inequality
between his profit and his equitable payoff, which is η times
the retailer’s profit. To be consistent with our assumption that
there is no information asymmetry regarding the equitable payoff
parameters, we assume that the retailer knows η. The channel
partners’ common knowledge of each other’s equitable payoff
parameters originates from their acceptance of a commonly held
standard for equitable distribution. Exogenous factors such as the
prevalent norm of sharing channel profit (Okun, 1981; Zhang,
Watson Iv, Palmatier & Dant, 2016), as well as endogenous factors
such as relative contributions of the channel partners (Blois, 2009;
Corsten & Kumar, 2005; Frazier, 1983), determine this commonly
held standard. Perception of equitable distribution may vary be-
tween players, but such variability cannot perpetuate. The partner
that finds the distribution inequitable feels dissatisfied (Frazier,
1983) and deprived (Corsten & Kumar, 2005), which disturbs the
stability of the relationship between the two firms (Blois, 2009).
To avoid instability, the partners address the conflicts arising out
of perceived inequity by means of direct communication (Zhang
et al., 2016). Hence, the players can arrive at a common standard
of equitable distribution, and the equitable payoff is determined
by that commonly held standard.
If equitable shares are determined by a common understanding
of an equitable distribution of the channel profit, the manufac-
turer’s equitable payoff parameter η should be the reciprocal
of the retailer’s equitable payoff parameter γ . Otherwise, the
manufacturer’s perception of equitable distribution remains incon-
sistent with the retailer’s perception, which is incompatible with
a common understanding of equity. If η = 1/γ , the distribution
that allocates a 1/(1 + γ ) share to him and a γ /(1 + γ ) share to
the retailer is perceived by the manufacturer as equitable, which
matches the retailer’s perception of equitable shares. It is not
possible to rationalise η = 1/γ if the channel partners know each
other’s equitable payoff parameters.
In the equilibrium of Model-M, and in that of Model-R,
πi = γ i , that is i = πi /γ = ηπi . Therefore, in either of the
equilibria, the manufacturer does not experience inequality, and
his profit-maximising optimal coincides with the optimal that
maximises his utility function. Thus, the equilibria remain un-
affected, and our results hold, even when the manufacturer is
concerned about fairness.
7. Discussion and conclusion
In this paper, we have addressed the apparent conflict between
fairness concern and efficiency in a CLSC and found that a decen-
tralised channel is efficient when the retailer is strongly averse
to both DI and AI. Moreover, the retailer is certainly better-off
being inequality averse if her equitable share in the channel
profit is greater than one-fourth. The manufacturer’s choice of the
wholesale price that maximises his profit (or utility if he too is
inequality averse) results in maximisation of the channel profit
and collection rate if his equitable share in the channel profit is
greater than that of the retailer. Our results hold whether the
collection is performed by the manufacturer, or by the retailer, if
the fixed cost of collection is sufficiently large. Between the two
models of collection, manufacturer collection is more efficient.
150
European Journal of Operational Research 295 (2021) 140–156
7.1. Contribution to the literature
We make several contributions to the CLSC literature. The liter-
ature on CLSC with fairness concerned players is sparse. Ma et al.
(2017), which is the only paper to study of CLSC with a fairness
concerned retailer using non-cooperative game theory, model a
retailer’s inequality aversion in terms of DIA only. They observe
that the efficiency reduces with an increase in the value of the DI
parameter (α ). By contrast, we show that a decentralised channel
is efficient, irrespective of the collection model, if the retailer is
concerned about both DI and AI. If the retailer is averse only to
DI, channel coordination may require a specific price contract to
prevent efficiency loss; this was proposed in Ma et al. (2017). Our
findings show that a complex contract is unnecessary to achieve
channel coordination if the retailer is averse to both types of
inequality. Without considering a fairness concern of any chan-
nel partner, Savaskan et al. (2004) observe that a decentralised
CLSC could attain the efficiency of a centralised CLSC by using a
two-part tariff contract, such that the manufacturer charges the
retailer a fixed fee and the unit cost of production. More complex
contracts, depending on the game structure, are proposed in Choi
et al. (2013). By contrast, we show that in a dyadic CLSC, channel
coordination is achievable at a constant wholesale price if the
retailer is sufficiently concerned with AI. The correct distribution
of the channel profit, in the form of the channel partners’ equi-
table shares, saves the cost of writing complex price contracts.
This new finding is a significant contribution to the literature on
efficiency-fairness trade-off in a CLSC.
The literature on OLSCs has demonstrated that DIA results in
a channel coordination problem (Nie & Du, 2017). Evidence of AIA
and its positive influence on channel efficiency have been observed
in experimental studies (Choi & Messinger, 2016; Cui & Mallucci,
2016; Niederhoff & Kouvelis, 2016) of OLSCs. However, there is no
theoretical or experimental research on channel efficiency in CLSCs
that considers the retailer’s aversion to both types of inequality.
This paper fills that gap and contributes to the literature on CLSCs.
Our results are consistent with the results in the literature on
OLSCs (Cui & Mallucci, 2016; Cui et al., 2007; Du et al., 2014)
that has considered both types of inequality aversion. Specifically,
our finding that a constant wholesale price can attain channel
coordination, in a CLSC, without centralisation, extends the sem-
inal work of Cui et al. (2007) who obtained the same result in
the context of an OLSC. Another important result obtained in
this paper corroborates with Cui and Mallucci (2016), who, in
the context of a fair OLSC, also show that the equitable share
depends on the game structure. In both models discussed in this
paper, the manufacturer is the Stackelberg leader, and his profit
maximisation maximises channel efficiency, only if his equitable
share is more than that of the retailer. The higher share of the
manufacturer is a fallout of the game structure, which confers a
first-mover’s advantage to the manufacturer.
In this paper, we have obtained new results because we have
considered AIA, which has been ignored in the literature of chan-
nel coordination in CLSCs. In the absence of any fairness concern,
a constant wholesale price contract cannot coordinate the channel
(Ma et al., 2017; Savaskan et al., 2004). However, that is possible
in the presence of concern for both AI and DI. This has been
demonstrated in the canonical work of Cui et al. (2007), in the
context of OLSCs. We have demonstrated that the fundamental
result of Cui et al. (2007) holds for CLSCs as well. Our result differs
from Ma et al. (2017), who observed fairness concern to have a
distortionary effect. Such distortion is the fallout of considering
only DIA and ignoring AIA. If the retailer is averse to only DI, she
chooses a retail price that not only increases her profit but also
decreases the manufacturer’s profit. However, if she is averse also
to AI, then she chooses a retail price that closes the gap between
S. Sarkar and S. Bhala European Journal of Operational Research 295 (2021) 140–156

her profit and her equitable payoff. AIA is the primary driver of It is even more important to experimentally examine the
enabling channel coordination by a constant wholesale price. results obtained in this paper. There are experimental studies that
In decentralised CLSCs, the collection model plays a critical role. have delved into investigating the role played by fairness concern
From a practitioner’s perspective, it is essential to know which in supply chain contracts, in the context of OLSC. However, there
model of collecting used items is more efficient in terms of collec- is little empirical research on the role of inequality aversion in the
tion rate and channel profit. ‘Retailer collection’ has been found to presence of a reverse channel. In this paper, we have theoretically
be the more efficient model in the absence of fairness concerns of observed the importance of the equitable payoff parameter, γ . The
the channel partners (Ma et al., 2017; Savaskan et al., 2004). Note literature on equitable distribution in the disciplines of marketing
that, in the absence of fairness concerns, it is not possible to attain and economics, which we have discussed briefly in Section 6.1,
channel coordination by a constant wholesale price. In contrast, has identified the sociological and behavioural determinants of the
the optimal wholesale price becomes the lever of channel coordi- perception of equitable distribution. Cui and Mallucci (2016) pio-
nation when the retailer is concerned about both DI and AI. Hence, neered experimental research in identifying the determinants of
it is not surprising that we found the ‘manufacturer collection’ the notion of fairness among channel partners. Our work further
model to be the more efficient one by incorporating the retailer’s highlights the need for such experimental investigations into
aversion to both DI and AI in our analysis. Excluding Ma et al. the notion of fairness in CLSCs, where the presence of a reverse
(2017), who considered only ‘manufacturer collection’, accounting channel complicates the coordination challenge.
only for the DIA of the retailer, there is no study of channel coor-
dination in CLSC under the retailer’s fairness concerns. In this pa- Acknowledgment
per, we have compared the models of ‘manufacturer collection’ and
‘retailer collection’ incorporating both forms of inequality aversion, The authors thank three anonymous referees for their valuable
and thus have enriched the literature. When the channel is coor- comments that helped immensely in improving the quality of
dinated by a constant wholesale price contract, in the presence of the paper. For the remaining errors, if any, the authors assume
both DIA and AIA, the ‘manufacturer collection’ model is more ef- complete responsibility.
ficient with respect to the collection rate as well as the channel
profit. Moreover, both the manufacturer and the retailer are better-
Appendix 1
off in the ‘manufacturer collection’ model. Our result is juxtaposed
to the findings in the existing literature of CLSC that has ignored
AIA and has maintained that the channel cannot be coordinate Proof of Proposition 1. We solve the manufacturer’s optimisation
by a constant wholesale price. Under the ‘manufacturer collection’ problems (4.5), (4.6), and (4.7) by applying the K–K–T conditions
model, the control over the collection rate in the reverse channel for constrained optimisation. The solution to the optimisation
allows the manufacturer to better optimise the channel through problem (4.5) is
the choice of an efficient wholesale price in the forward channel.    
A 4B −bd2 (1 + α )2 +bc bd2 α 2 γ 2 +4B(1+ α )(1+ α +2αγ )
wDm∗ =   ,
7.2. Managerial implications b 8B(1 + α ) + bd2 (−1 + α (−1 + γ ) ) (1 + α + αγ )
(A1.1)
Our findings have the following managerial implications:
where, D∗
wm > wD
m, if
1. It is possible to achieve channel coordination in a decentralised
CLSC without designing complex contracts. The channel gets 1 1+α
α< , < γ < 1, d ≤ d1D , B ≥ BD1 , (A1.1.a)
coordinated by a constant wholesale price contract, under a 2 2−α
commonly held notion of equitable distribution of the channel or if
profit, such that the manufacturer’s share is greater than half
1 1+α
and that of the retailer is at least one-fourth. α< , < γ < 1, d > d1D , B > BD2 , (A1.1.b)
2. It is more efficient if the manufacturer is responsible for col- 2 2−α
lecting the end-of-use products when channel coordination is where
achieved by a constant wholesale price contract, particularly if −A + bc−2Aα + 2bcα −Aα 2 + bcα 2 + 2Aγ −2bcγ + Aαγ −bcαγ −Aα 2 γ + bcα 2 γ
it is costly to increase the collection rate. d1D =
b+ 2bα + bα 2 + 2bαγ + 2bα 2 γ + bα 2 γ 2

7.3. Scope of future research

2dγ (A − bc ) + bd2 γ (1 − α − αγ )
BD1 = ,
This research may be extended in two different dimensions 4(1 + α + αγ ) + 8γ
– (i) technical specifications of the model, and (ii) experimental −bd2 γ − 2bd2 αγ − bd2 α 2 γ + bd2 αγ 2 − bd2 α 2 γ 2
BD2 = .
inquiry into the theoretical results. There are a few directions in 4 + 8α + 4α 2 − 8γ − 4αγ + 4α 2 γ
which the modelling assumptions of the game may be modified.
It may be looked at if the results derived in this paper, under the The resultant profit is
assumption of a linear demand, hold when the demand is non-
B(A − bc ) (1 + α )2
2
linear. Another complexity worthy of investigation is the presence m
D1∗
=   ,
of peer-regarding preferences and distributional fairness concerns b 8B(1 + α ) + bd2 (−1 + α (−1 + γ ) ) (1 + α + αγ )
under (a) retailer competition and (b) competition between the (A1.2)
OEM and a remanufacturer. The impact of incomplete information
may also be explored. In our models, the channel partners know The solution of (4.5) is
each other’s inequality aversion parameters. In the absence of such D∗
wm = wDm , (A1.3)
complete information, the manufacturer would be particularly in-
terested in knowing the magnitude of the retailer’s AI parameter. if
Hence, it might be worth studying plausible mechanisms for the 1 1+α
retailer to signal how strongly she is averse to AI. α< , γ ≤ , d < d2D , B ≥ BD1 , (A1.3.a)
2 2−α
151
S. Sarkar and S. Bhala European Journal of Operational Research 295 (2021) 140–156

or if or if
1 1+α 1 1−β
α< , < γ < 1, d1D ≤ d < d2D , BD1 ≤ B < BD2 (A1.3.b) β≤ , < γ < 1, d > d2A , B > BA2 , (A1.7.b)
2 2−α 2 2+β
or if or if
1
≤ α, γ < 1, d < d2D , B≥ BD1 , 1 1−β 1−β
(A1.3.c) ≤ β < 1, <γ < , d < d2A , B ≥ BA1 (A1.7.c)
2 2 2+β β
where
or if
4Aγ − 4bcγ + 4Aαγ − 4bcαγ
d2D = . 1 1−β 1−β
b + 2bα + bα 2 + 2bαγ + 2bα 2 γ + bα 2 γ 2 ≤ β < 1, <γ < , d ≥ d2A , B > BA2 (A1.7.d)
2 2+β β
The resultant profit is
The resultant profit is
   
4B(A − bc )
2
γ 4B(1 + α ) + bd2 αγ 4B(A − bc )
2
γ 4B(1 − β ) − bd2 βγ
m
D2∗
=  2 ,  A2∗
m = , (A1.8)
b bd2 γ (−1 + α + αγ ) + 4B(1 + α + 2γ + αγ ) b[bd2 γ (1 + β + βγ ) − 4B(1 − β + 2γ − βγ )]
2

(A1.4) The unique solution to (4.7) is

   
The solution to the optimisation problem (4.6) is A 4B − bd2 (2 + γ ) − bc 4B(1 + 2γ ) − bd2 γ
    w∗m =   , (A1.9)
A 4B − bd2 (1 − β ) + bc bd2 β 2 γ 2 + 4B(1 − β )(1 − β − 2βγ )
2 2b 4B − bd2 (1 + γ )
A∗
wm = ,
b[8B(1 − β ) − bd2 {1 − β (1 − γ )}](1 − β − βγ ) where,
(A1.5)
wAm < w∗m < wDm ,
where,
if
wAm∗ < wAm , 1 1
β> > , and B ≥ BA1 (A1.9.a)
if 1+γ 2
1 1−β The resultant profit is
β≤ , γ≤ , 0 < d < d1A , B ≥ BA1 (A1.5.a)
2 2+β 2
B(A − bc )
or if ∗m =   , (A1.10)
b 4B − bd2 (1 + γ )
1 1−β
β≤ , < γ < 1, d2A < d < d1A , BA1 ≤ B < BA2 (A1.5.b) Under conditions (A1.9a), ∗m given in (A1.10) is higher than
2 2+β
the profits given in (A1.2), (A1.4), (A1.6), and (A1.8). Therefore, the
or if manufacturer attains his global optimal at w∗m .
1 1−β The retailer does not experience inequality when the manufac-
< β < 1, γ≤ , 0 < d < d1A , B ≥ BA1 (A1.5.c) turer chooses w∗m , as wAm < w∗m < wD
2 2+β m . Therefore, under conditions
(A1.9a), in the equilibrium, the retailer’s profit is πm∗ = γ ∗ , and
m
or if the channel profit is Sm ∗ = π ∗ + ∗ = (1 + γ )∗ . This proves
m m m
1 1−β 1−β that in Model-M, the wholesale price, w∗m , which maximises the
< β < 1, <γ < , d2A < d < d1A , BA1 ≤ B < BA2 , manufacturer’s profit, also maximises the channel profit. 
2 2+β β
(A1.5.d) Proof of Proposition 2. From Proposition 1, we know that the
equilibrium wholesale price, retail price, and collection rate are
where
w∗m , p∗m , and T∗m . A comparison between Tˆ m and T∗m , and between
4Aγ − 4bcγ − 4Aβγ + 4bcβγ Sˆm and Sm ∗ , shows that T∗ > T
ˆ m and Sm ∗ > Sˆ .
d1A = , m m
b − 2bβ + bβ 2 − 2bβγ + 2bβ 2 γ + bβ 2 γ 2 From Proposition 1, the manufacturer’s optimal wm is w∗m ,
and the resultant profit is ∗m if 1+1γ > 12 , that is if γ < 1. A
−A + bc+ 2Aβ −2bcβ −Aβ 2 + bcβ 2 + 2Aγ −2bcγ −Aβγ + bcβγ −Aβ 2 γ + bcβ 2 γ
d2A = , ˆ m if γ < 1.
b−2bβ + bβ 2 −2bβγ + 2bβ 2 γ + bβ 2 γ 2 comparison shows that ∗m > 
4B (4B−bd2 )
Also, πm
∗ >π
ˆ m if γ > γm , where γm = 2 . 
(8B−bd2 ) −4B(4B−bd2 )
2dγ (A − bc ) + bd γ (1 + β + βγ )
2
BA1 = ,
4(1 − β − βγ ) + 8γ Appendix 2
−bd2 γ + 2bd2 βγ − bd2 β 2 γ − bd2 βγ 2 − bd2 β 2 γ 2
BA2 = . Derivation of the optimal retail prices in Model-R with inequality
4 − 8β + 4β 2 − 8γ + 4βγ + 4β 2 γ
averse retailer
The resultant profit is
The retailer’s utility under DI is
B(A − bc ) (1 − β )
2 2
Am1∗ = , (A1.6)  
b[8B(1 − β ) − bd2 {1 − β (1 − γ )}](1 − β − βγ ) UrD = (A − b pr )[ pr − wr + μTr ] − BTr2
The solution of (4.6) is − α [γ {(A − b pr )[wr − c + (d − μ )Tr ]}
 
− (A − b pr )[ pr − wr + μTr ] − BTr2
wAm∗ = wAm , (A1.7)
if Maximising UrD , the retailer’s optimal Tr in Stage 4 is
1 1−β (A − b pr )[(1 + α + αγ )μ − dαγ ]
β≤ , < γ < 1, d ≤ d2A , B ≥ BA1 , (A1.7.a) Tr = (5.4)
2 2+β 2B ( 1 + α )

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By substituting (5.4) in (3.4) and then maximising r , we (A − b pr )[(1 − β − βγ )μ + dβγ ]

Tr = (5.8)
obtain the manufacturer’s optimal μ in Stage 3: 2B ( 1 − β )
d (1 + α + 2αγ ) By substituting (5.8) in (3.4) and then maximising r , we
μ= (5.5)
obtain the manufacturer’s optimal μ in Stage 3 as
2(1 + α + αγ )
d (1 − β − 2βγ )
By substituting (5.5) in (5.4), we obtain μ= (5.9)
2(1 − β − βγ )
(A − b pr )[d (1 + α + 2αγ ) − 2dαγ ]
Tr = (5.6) By substituting (5.9) in (5.8), we obtain
4B ( 1 + α )
(A − b pr )[d (1 − β − 2βγ ) + 2dβγ ]
Because 0 < Tr < 1, we obtain, pr > Tr = (5.10)
A{d (1+α +2αγ )−2dαγ }−4B (1+α ) 4B ( 1 − β )
b{d (1+α +2αγ )−2dαγ }
= pDr (say).
There is DI for the retailer if and only Because 0 < Tr < 1, we obtain pr >
A[d (1−β −2βγ )+2dβγ ]−4B (1−β )
= pAr 1 (say).
if πr < γ r that is if pr < pDr , where pDr = b[d (1−β −2βγ )+2dβγ ]
wr 16B (1+α +γ +2αγ +αγ 2 )−Ad2 (1+α +αγ −2γ )+16Bcγ (1+α +αγ ) There is AI for the retailer if and only if πr > γ r , namely, if
16B (1+α +αγ )−bd 2 (1+α +αγ −2γ ) pr > pAr 2 , where
By substituting μ and Tr , from (5.5) and (5.6), respectively, in  
wr 16B 1 − β + γ −2βγ − βγ 2 −Ad2 (1 − β − βγ −2γ ) −16Bcγ (1 − β − βγ )
UrD and maximising subject to pDr < pr < pDr , we obtain pAr 2 =
16B(1 − β − βγ ) −bd2 (1 − β − βγ −2γ )
 
A 8B − bd2 (1 + α ) − 8bB[cαγ − wr (1 + α + αγ )] By substituting μ and Tr from (5.9) and (5.10), respectively,
pr =   , (5.7) in UrA and maximising the subject to max{ pAr 1 , pAr 2 } < pr < Ab , we
b 16B − bd2 (1 + α )
obtain
A+bcγ 2  
if wD
r ≤ wr < b+bγ
, and only if B > max{ b16
d
, BD } (by K–K–T), A 8B − bd2 (1 − β ) + 8bB[cβγ + wr (1 − β − βγ )]
where
pr =   , (5.11)
b 16B − bd2 (1 − β )
bd (1 + α + αγ + 2γ )
2
BD = if c < wr ≤ wAr , and only if B > max{ b16
d 2
, BA } (by K–K–T), where
16(1 + α + αγ )
bd2 (1 − β − βγ + 2γ )
and BA =
16(1 − β − βγ )
and

16AB − Abd2 + 32ABα − 2Abd2 α + 16ABα 2 − Abd2 α 2 In the absence of any inequality, the retailer’s utility is the same
+ 32bBcγ − 2Abd2 γ − 2b2 cd2 γ + 16ABαγ + 48bBcαγ as her profit (3.5); hence, the optimal Tr is as provided in (5.3).
− 3Abd2 αγ − 3b2 cd2 αγ + 16ABα 2 γ + 16bBcα 2 γ The retailer does not experience any form of inequality if and
− Abd2 α 2 γ − b2 cd2 α 2 γ + 32bBcαγ 2 − 4b2 cd2 αγ 2 only if πr = γ r , namely,
+ 16bBcα 2 γ 2 − b2 cd2 α 2 γ 2 Ad2 (2γ − 1 ) + 16B[wr + γ (wr − c )]
wDr = pr = (5.12)
16bB − b2 d2 + 32bBα − 2b2 d2 α + 16bBα 2 − b2 d2 α 2 + 32bBγ 16B + bd2 (2γ − 1 )
− 4b2 d2 γ + 64bBαγ − 6b2 d2 αγ + 32bBα 2 γ − 2b2 d2 α 2 γ
which occurs only if wAr < wr < wD
r.
+ 32bBαγ 2 − 4b2 d2 αγ 2 + 16bBα 2 γ 2 − b2 d2 α 2 γ 2
The retailer’s utility under AI is Manufacturer’s optimization problem in Model-R with inequality
  averse retailer
UrA = (A − b pr )[ pr − wr + μTr ] − BTr2
 
−β (A − b pr )[ pr − wr + μTr ] − BTr2 Anticipating that the inequality averse retailer will choose the
retail price, pr , following (5.7), (5.11) and (5.12), respectively, under
− γ {(A − b pr )[wr − c + (d − μ )Tr ]}] DI, AI, and no inequality, the manufacturer chooses the optimal
Maximising UrA , the retailer’s optimal Tr in Stage 4 is wholesale price, wr , in Stage 1.
For the case of DI, by substituting (5.7) in the manufacturer’s
profit function (3.4), we obtain his Stage 1 optimisation problem:
⎧  
⎪
⎪ 8B[A(1 + α ) + bcαγ − bwr (1 + α + αγ )] 16B(wr − c )(1 + α + αγ ) + d2 {A(1 + α ) − 2bwr (1 + α + αγ ) + bc (1 + α + 2αγ )}
⎪max
⎨  2
16B − bd2 (1 + α )(1 + α + αγ )
⎪
⎪ A + bcγ
⎪
⎩s.t., wDr ≤ wr <
b + bγ
(5.13)

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For the case of AI, by substituting (5.11) in the manufacturer’s

profit function (3.4), we obtain his Stage 1 optimisation problem:
⎧  
⎨max 8B[A(1 − β ) − bcβγ − bwr (1 − β − βγ )] 16B(wr − c )(1 − β − βγ ) + d {A(1 − β ) − 2bwr (1 − β − βγ ) + bc(1 − β − 2βγ )}
⎪ 2

2
16B − bd2 (1 − β )(1 − β − βγ )
⎪
⎩
s.t., c < wr ≤ wr
A

(5.14)

The solution to the optimisation problem (5.14) is

In the case of no inequality, by substituting (5.12) in the manu-    
facturer’s profit function (3.4), we obtain his Stage 1 optimisation A 16B − 3bd2 (1 − β ) + bc 16B(1 − β − 2βγ ) − bd2 (1 − β − 4βγ )
wAr ∗ =  
problem: 4b 8B − bd2 (1 − β − βγ )
⎧  2  (A3.5)
⎨max 16B d {2A − b(3wr − c )} + (wr − c ){A − b(wr + γ (wr − c ) )}
⎪
16B + bd2 (1 − 2γ )
2 where wAr ∗ < wAr if
⎪
⎩ 1−β
A D
s.t., wr < wr < wr γ≤ , β < 1,
2+β
(5.15)
and
Proof of Proposition 3. We solve the manufacturer’s optimisation
problems (5.13), (5.14), and (5.15) by applying K–K–T conditions. B > BA (A3.5a)
The solution to the optimisation problem (5.13) is
    1−β 1−β
A 16B − 3bd2 (1 + α ) + bc 16B(1 + α + 2αγ ) − bd2 (1 + α + 4αγ ) orif <γ ≤ , β < 1, and BA1 ≥ B > BA (A3.5b)
wrD∗ =   2+β 1+β
4b 8B − bd2 (1 + α + αγ )
bd2 (1−β −βγ −4γ )
where BA1 = 16(1−β −βγ −2γ )
(A3.1)
The resultant profit is
where wrD∗ > wD
r if
B(A − bc ) (1 − β )
2
1 2γ − 1 Ar 1∗ =   (A3.6)
< γ < 1, α < , and B > BD1 (A3.1a) b 8B − bd2 (1 − β − βγ )
2 1+γ
bd2 (1+α +αγ −4γ ) The solution to (5.14) is
where BD1 = 16(1+α +αγ −2γ )
The resultant profit is wAr ∗ = wAr , (A3.7)
if
B(A − bc ) (1 + α )
2
rD1∗ =   (A3.2) 1−γ 1
b 8B − bd2 (1 + α + αγ ) γ < 1, <β< , and B > BA1 (A3.7a)
1+γ 1 + 2γ
The solution to (5.13) is The resultant profit is
wrD∗ = wDr , (A3.3)  
16B(A − bc ) 16B − bd2 (1 − β )γ
2

if Ar 2∗ =
b[16B(1 − β − βγ + 2γ ) − bd2 (1 − β − βγ + 4γ )]
2
1
γ ≤ , (A3.3a) (A3.8)
2
or if The unique solution to (5.15) is
1 2γ − 1    
< γ < 1, α ≥ , andB > BD . (A3.3b) A 16B − bd2 (5 + 2γ ) + bc 16B(1 + 2γ ) − bd2 (1 + 4γ )
2 1+γ w∗r =   ,
2b 16B − 3bd2 (1 + γ )
The resultant profit is
  (A3.9)
16B(A − bc ) 16B − bd2 (1 + α )γ
2

rD2∗ = where
b[16B(1 + α + 2γ + αγ ) − bd2 (1 + α + 4γ + αγ )]
2
wAr < w∗r < wDr ,
(A3.4)
if
2 1 3bd2
≤β < , γ < 1, and <B<B (A3.9a)
2 + 3γ + γ 2 1+γ 16
or if
1 3bd2
≤ β < 1, γ < 1, and B ≥ max ,B (A3.9b)
1+γ 16
where,

bd [4Aγ (1 − β − βγ − 2γ ) − 4bcγ (1 − β − βγ − 2γ ) − bd (1 + γ ){1 + 4γ + β 2 (1 + γ ) − 2β (1 + 3γ + 2γ 2 )}]

2 2
B=
16(1 − β − βγ )[4Aγ − 4bcγ − bd (1 + γ )(1 − β − βγ + 2γ )]

154
S. Sarkar and S. Bhala
The resultant profit is
2
4B(A − bc )
∗r =   , (A3.10)
b 16B − 3bd2 (1 + γ )
Under conditions (A3.9a) or (A3.9b), ∗r given in (A3.10) is
greater than the profits given in (A3.2), (A3.4), (A3.6), and (A3.8).
Therefore, the manufacturer attains his global optimal at w∗r .
The retailer does not experience inequality when the manufac-
turer chooses w∗r , as wAr < w∗r < wDr . Therefore, under conditions
(A3.9a) or (A3.9b), in the equilibrium, the retailer’s profit is πr∗ =
γ ∗r , and the channel profit is Sr∗ = πr∗ + ∗r = (1 + γ )∗r . This
proves that in Model-R, the wholesale price, w∗r , which maximises
the manufacturer’s profit, also maximises the channel profit.  economics. Journal of Business, 59(4), S285–S300.
Proof of Proposition 4. A comparison between Sˆr and Sr∗ shows
that Sr∗ > Sˆr .
d2
Tˆ r ≥ T∗r only if B ≤ b16 . Additionally, 
ˆ r ≥ ∗r only if
2 2
B ≤ b16
d
. However, B > 316
bd
is a necessary condition specified
in Proposition 3. Therefore, under any of the sets of conditions
provided in Proposition 3, Tˆ r < T∗r and 
ˆ r < ∗r .
Also, πr > πˆ r
∗ if γ > γm , where γr =
2 Loewenstein, G. F., Thompson, L., & Bazerman, M. H. (1989). Social utility and deci-
256B2 −64bd2 +3 (bd2 )
2 2 . 
3[256B2 −64bd2 +3 (bd2 ) ]+ (2bd2 )
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