On supplier encroachment with retailer’s fairness concerns

• We introduce the retailer’s fairness concerns into the supplier encroachment problem.
• The retailer’s profit may decrease in her disadvantageous-inequality aversion degree.
• The supplier has more flexibility to encroach.
• The retailer has more possibility to benefit from supplier encroachment.

With the development of e-commerce, many wholesale suppliers establish direct channels competing with their retailers. Such competition is often referred to as supplier encroachment. Previous studies assume the perfect rationality of retailers. However, supplier encroachment may trigger the fairness concerns of the retailers as a supplier is also a competitor of its retailer if the supplier encroaches. Thus, we introduce retailer’s fairness concerns into the encroachment problem and explore its impact. It is shown that encroachment may be detrimental to the supplier when the retailer has strong fairness concerns and a significant marketing advantage. If the retailer has a significant marketing advantage, retailer’s profit may decrease as her fairness concerns become much stronger. Numerical illustrations demonstrate that, when the retailer is fairness concerned, the supplier has more flexibility to encroach and the retailer has more possibility to benefit from encroachment in most cases. Moreover, retailer’s fairness concerns can bring a remarkable improvement to the system profit.