Discussion Paper

No. 2018-35 | April 19, 2018
Fairness concerns and risk aversion on recycle pricing strategies: implications for environmentally friendly supply chains

Abstract

This paper studies the pricing strategy in the closed-loop supply chain with Nash bargaining when considering fairness concerns and risk aversion. Mainly, the authors argue that behavioral factors (i.e., fairness concern and risk aversion) should be introduced into pricing process. They consider three different pricing models: the first is that both manufacturer and retailer have fairness concern; the second is both manufacturer and retailer have risk aversion and the final is manufacturer has risk aversion but retailer has both risk aversion and fair concern. Then the authors analyze the model with game theory. The results show that fairness and risk aversion change the optimal pricing strategy, which affects the expected profits of retailers and manufacturers. The impact of the two (relatively irrational) behavioral factors on wholesale price and retail price of new products, as well as the recycle price and recycle transfer price of the waste products are not the same. For new products, wholesale price is the most affected by the behavioral factors, and the sales price as the second. For the waste recycling products, the transfer price is the most affected by the behavioral factors, and recycle price as the second. When facing the fairness and risk aversion retailer, retailers' fairness concern is good for both manufacturers and retailers. This innovative model for pricing strategy adds implications for sustainability in supply chain operations.

JEL Classification:

D4, L11

Assessment

  • Downloads: 166

Links

Cite As

Jianhong He, Lei Zhang, Binbin Lu, and Lin Li (2018). Fairness concerns and risk aversion on recycle pricing strategies: implications for environmentally friendly supply chains. Economics Discussion Papers, No 2018-35, Kiel Institute for the World Economy. http://www.economics-ejournal.org/economics/discussionpapers/2018-35


Comments and Questions


Anonymous - Invited Reader Comment
April 25, 2018 - 09:37

1. A very nice paper with good choice of topic.
2. You may want to justify why this issue is important in the context (e.g., country, area, industry, etc.) you studied or referred to when making simulation.
3. Why is ...[more]

... it conducted in close-loop context.
4. More strengthened implications for practitioners are needed.
5. The length of the paper should be more compact (shorter).


Anonymous - Overall topic
April 25, 2018 - 10:49

Environmental protection is a global issue. The paper offers some useful insights.


Anonymous - Referee Report 1
April 30, 2018 - 08:13

This paper studies the impacts of fairness concern and risk aversion on the market outcomes, assuming that wastes generated by consumers are bought and recycled by the manufacturer. The authors show that the optimal pricing strategy is affected by fairness concern and risk aversion.

The paper is poorly written, ...[more]

... and the analysis is inconsistent. I think this paper cannot be published in any journal in the current form. Below I mention a few, among many, problems that the authors may want to consider.

1. The authors do not motivate the study. Not all readers of a general economics journal know what "closed-loop supply chain" is. A definition and examples must be provided.

2. Fairness concern and risk aversion have been studied by economists for very long time, and there are many studies to be cited. But only a few recent studies by Chinese authors are cited.

3. The paper is full of typos, grammar errors and odd expressions. It is very difficult to follow.

4. There is no uncertainty in the model, so no need to consider the "expected" profits.

5. The authors adopt the subgame perfect Nash equilibrium (which is for noncooperative games) as the solution concept when analyzing the case without fairness concern, while the Nash bargaining solution (which is for cooperative games) when analyzing the one with it. This is inconsistent, and therefore, the comparison is improper.

6. It is hardly surprising that the optimal pricing strategy is affected by the behavioral factors. The authors may want to search for ways to emphasize the contributions.


Anonymous - Referee Report 2
May 02, 2018 - 08:39

This paper considers a supply chain model where the product can be recycled. It analyses how the results change when one incorporates behavioral concerns such as fairness and risk attitudes in such structure.

This paper is not appropriate to be published in a journal. This conclusion is drawn due ...[more]

... to both technical and expositional deficiency.

The paper is not an easy read. It is full of wrong English, arbitrary format and typographical, grammatical and various other errors. These should have been taken care of before submission.

Content-wise, it is never clear why this question is important, and the answer that ‘behavioral concerns matter’ is nothing new. Why only fairness and risk are considered and not hundred other behavioral factors?

The model set-up is rather arbitrary. For example: no reason or literature support or field observation for the structure of the model is given. It is never clear why firms would have fairness concern in a monopolistic setting, but such concern excludes the consumers altogether! Furthermore, the linear fairness model is a poor rip-off of the model by Fehr and Schmidt, but that paper is never mentioned. The model assumes sequential moves of the manufacturer and the retailer, but then wrongly assumes that the recycled product comes back to the manufacturer instantly without any lag. It is very surprising to use SPNE and Nash bargaining alternatively without any valid reason.

My overall suggestion would be to rewrite the whole paper based on the initial idea, but that would be a different paper altogether.


Anonymous - Invited Reader Comment
May 09, 2018 - 08:28

The paper is good, because it offers a clear analysis and guidance for the pricing strategy in the context they research. But this is also where the question emerges. Why is the context you researched important? Only if you provide a clear answer for this question, my positive evaluation for ...[more]

... the good topic and successful implementation of the study could be true.
Second one is why should we care about the issue in China?