Effect of fairness and overconfidence on pricing strategy of substitute bundles in a two-echelon supply chain

¹ Department of Mathematics, Indian Institute of Engineering Science and Technology, Shibpur, Howrah 711103, West Bengal, India
² School of Management & Entrepreneurship, Indian Institute of Technology, Jodhpur 342027, Rajasthan, India
³ Department of Applied Mathematics, Oceanology and Computer Programming, Vidyasagar University, Midnapore 721102, West Bengal, India

^* Corresponding author: sanchariganguly30@gmail.com

Received: 20 March 2022
Accepted: 27 January 2023

Abstract

Cognitive biases – fairness and overconfidence, affect the decision-making process. The manufacturer/retailer prefers to sell the products as bundles in a duopoly market because it fetches more benefits to supply chain (SC) partners. Till now, none considered the pricing of substitute bundles, produced and sold at the manufacturer’s level. Considering these, the effects of the above cognitive behaviours on the bundling pricing strategy are investigated. We develop several SC models, depending on the partner’s cognitive biases, with two manufacturers, producing substitute bundles of two uncorrelated items and selling through a retailer. Using the Stackelberg game, prices and profits are evaluated. It is observed that overconfidence does not increase retailer’s and overconfident – manufacturer’s profits but is beneficial for another rational manufacturer. Against the retailer’s fairness concern, her profit is augmented, but both manufacturers’ profits are adversely affected. The combined effect of both cognitive biases is adjuvant for the retailer but maleficent for manufacturers. Managerial insights are presented.