The Bright Side of Inequity Aversion

Modern consumers are concerned about not only their material payoff, but also the fairness of the transaction when making purchasing decisions. In this paper, we investigate how consumers' inequity aversion affects a manufacturer who sources inputs from upstreamsuppliers. We find that, when the manufacturer sources from a single supplier or when consumers observe the manufacturer's cost, inequity aversion hurts both the supplier's and manufacturer's profits. However, when the manufacturer sources from multiple suppliers and consumers do not observe the manufacturer's cost, inequity aversion reduces both the suppliers' and manufacturer's margins, which significantly alleviates the double marginalization problem, increases consumer demand, and improves channel efficiency. As a result, inequity aversion benefits the suppliers, manufacturer, and consumers alike, leading to a win-win-win outcome. By comparing cases in which consumers observe and do not observe the manufacturer's cost, we also find that, when faced with inequity-averse consumers, a manufacturer may find it optimal to withhold its cost information to help secure lower procurement costs from upstream suppliers.

Automated summary

This paper investigates how consumers' inequity aversion affects a manufacturer who sources inputs from upstream suppliers. The findings show that inequity aversion can either hurt or benefit the profits of the supplier and manufacturer, depending on the sourcing strategy and consumer observability of the manufacturer's costs. Inequity aversion can reduce margins and improve channel efficiency when the manufacturer sources from multiple suppliers and cost information is not observed by consumers.