Supply chain quality and pricing decisions with retailer fairness concerns and consumer dynamic reference quality effects.

This study considers a two-tier supply chain consisting of a fairness-neutral manufacturer and a fairness-concerned retailer. The manufacturer adjusts product quality and distributes the products through the retailer. The retailer sells the products to consumers having reference quality (RQ) effects that depend on the previously purchased product quality and change over time, and is assumed to have three, i.e., fairness neutral (FN), fairness-concerned with the status reference point (FSP) and fairness-concerned with the non-status reference point (FNSP), behaviors. The supply chain is modeled as a Stackelberg game wherein the manufacturer has the first mover advantage. The utility optimal control models with fairness concerns (FC) and RQ effects under FN, FSR and FNSR are developed using prospect theory, and are reformulated using the Hamilton-Jacobi-Bellman equations as tractable forms to derive the dynamic pricing and quality decisions. The results show that pricing and quality decisions are influenced by the FN, FSR and FNSR behaviors over time. The steady-state quality and wholesale price are, but the steady-state retail price is not, influenced by the fairness reference profit and the RQ. The manufacturer should cede some profit to the retailer with FC, especially when the retailer has the bargaining power. The FC is not always beneficial to the retailer. Numerical experiments are performed to examine the effects of the major parameters on the manufacturer and retailer utilities and to derive the managerial implications [ABSTRACT FROM AUTHOR]