U of M researcher finds fairness leads to better profits for manufacturers and retailers

In the paper “Fairness and Channel Coordination,” published in Management Science, Tony Haitao Cui, assistant professor of marketing, finds that in a marketing channel consisting of a manufacturer and a retailer, a consistent wholesale price throughout can maximize the profits for both the manufacturer and the retailer. In short, looking beyond initial monetary payoffs will benefit both firms in a marketing channel.

“Traditionally manufacturers and retailers set prices that were best for each of them, without regard to the other firm in the channel,” said Cui. “What this study shows is that when the channel members think about fairness and set a constant wholesale price, both partners benefit by getting a better price in the market place.”

Cui and co-authors Jagmohan Raju, and Z. John Zhang, of the Wharton School of Business, started by looking at the relationship between a manufacturer and a retailer to see how the concept of fairness affected channel coordination.

“What we found is that while elaborate pricing contracts may be one way to increase channel profits, it is far simpler than that,” explains Cui. “When the retailer and the manufacturer are working within a mindset of fairness, coordination between them is simplified by setting a constant price instead of one that benefits one over the other.

“The most important outcome of this study is that when the retailer and the manufacturer voluntarily align their interests, it benefits both of them, more than it would if they were just looking out for their own bottom-line.”