Unfair and Risky? Profit Allocation in Closed-Loop Supply Chains by Cooperative Game Approaches

Abstract

Behavioral factors (i.e., risk aversion and fairness concern) are considered for profit allocation in a closed-loop supply chain. This paper studies a two-echelon closed-loop supply chain (CLSC) consisting of a risk-neutral manufacturer, a risk-averse fairness-neutral retailer, and a risk-neutral retailer having fairness concerns. Cooperative game analysis is used to characterize equilibriums under five scenarios: a centralized, a decentralized and three partially allied models. Analytical results confirm that even when factoring in retailers’ risk aversion and fairness concern, the centralized model still outperforms decentralized. This paper makes a numerical study on the effects of risk aversion and fairness concern on profit distribution under these five models. It reveals that the impact of the risk aversion parameter and fairness concern parameter is dynamic, not always positive or negative. These research results provide helpful insights for CLSC managers to find out available choices and feasible ways to achieve fair profit allocations.