Social equity in supplier-buyer relationships in smallholder agri-food supply chains

We study supplier–buyer relationships in smallholder agri-food supply chains with equity concerns and under stakeholder engagement. We develop a game theoretic model to study the impact of these socially responsible practices in investment and pricing decisions. We model this as a Stackelberg game and study the impacts of the power structure in the outcomes. Our work was motivated by the business model of socially responsible Mexican company Fractal Café. We provide closed form expressions for the optimal wholesale and retail prices, and numerically study the effect of the model parameters. We show that equity concerns drive a redistribution of the profit towards an equitable outcome, but they do not have the same effect on the investment decisions. Additionally, we show that equity concerns may reverse the advantage of the game leader and transfer utility to the follower. We identify the settings under which the introduction of socially responsible practices increases the total supply chain profit by reducing the double marginalization effect. We find that capacity constraints result in a higher retail price, achieved by increasing the leader’s margin. Finally, we show that a two-part tariff contract with equity concerns is only convenient for the game follower when the leader has a high concern for advantageous inequity.