06.01.2021

Fairness Concern and Distribution Channel Selection

YI, Zelong | WANG, Yulan | LIU, Yun | 陳瀅儒

As unfairness in business transactions widely exists nowadays, consumers are increasingly worried about fairness. This kind of concern of fairness drives them to compare their payoffs with the sellers’ profits, and where a transaction is deemed inequitable, consumers may refuse to accept it. At the same time, such concern of price fairness also impacts a firm operation, such as the distribution channel structure selection.

There are two distribution channel structures that a manufacturer may opt for, namely direct selling, where a manufacturer sells products directly to consumers, and agent selling, where it sells products via a middleman retailer. The decision as to which channel to adopt is closely dependent on the consumers’ fairness concern, as opposed to most of the existing opinions that it depends on the manufacturers’ skills or capabilities. It is suggested in this article that where the consumers’ fairness concern is strong, manufacturers are more likely to prefer agent seller to an intermediary retailer. This is because the agent-selling channel raises the sellers’ procurement cost of the products concerned and alleviates consumers’ fairness concerns. On the other hand, where the consumers are not fairness-minded, it may be in the manufacturer’s best interest to adopt direct selling, as it eliminates the double marginalization effect. Therefore, it is of utmost importance to incorporate consumers’ fairness concerns when it comes to manufacturers’ distribution channel design.

This article further expands the scope of the aforesaid distribution channel structure selection to five aspects. First, it is found that where consumers care about fairness more than manufacturer’s profit and agent selling is adopted, even though the manufacturer cannot profit from agent selling, the distribution channel as a whole will be benefited by agent selling. Moreover, when agent selling is adopted, the number of retailers involved in the decentralized distributional channel makes no difference on manufacturer’s profitability. Furthermore, supposedly, a seller – the manufacturer under direct-selling channel and the retailer under agent-selling channel – determines the retail price. Yet, in reality, the manufacturer could possibly be the dominant player and control the retail price even under agent selling (in form of manufacturer-suggested retail price). In fact, under the decentralized distribution channel, whether the retail price is decided by the retailer or the manufacturer would lead to the same result in terms of the channel performance. In addition, these findings maintain only when the portion of fairness-minded consumers has reached a certain threshold. In real life, however, it is possible that there is a (large) fraction of consumers who have no fairness concerns. In that case, direct selling is always favoured by the manufacturers. Last, these results are derived under a uniform demand distribution.

Therefore, it is important to take the consumers’ fairness concerns into account when selecting the most profitable distribution channel. The existing literature mostly assumes a symmetric information setting between the distribution channel parties and the consumers. We are looking forward to seeing further research on generating the greatest profits in an asymmetric information situation.

陳瀅儒

Professor
Information Systems, Business Statistics & Operations Management