An Allocation Game Model With Reciprocal Behavior And Its Applications

Conventional economics assumes that people are completely rational, selfish and make choices to maximize their profits. However, with the appearance of new economic phenomena and paradoxes, the traditional economics is facing with great challenges. Behavioral economics combines psychological theory with conventional economics and uses experimental method to verify the hypothesis that people are not rational completely when they are making decisions. Also, in the field of supply chain management, scholars expand traditional supply chain management theory considering irrational behavior, such as fairness, overconfidence and so on. and propose some behavioral models.Commonly, people are much nicer in response to friendly actions and much nastier and even brutal in response to hostile actions. In social psychology, such a phenomenon is called reciprocity. Reciprocity exists in our daily life and is considered to be a strong determining factor of human behavior. This paper concentrates on reciprocity theory and applies it in operation management.As an extension of the standard Stackelberg game, we propose a new allocation game framework with consideration of such reciprocal behavior. Specifically, we consider a situation in which the follower evaluates the leader’s kindness not only depending on the leader’s action, but also on the leader’s intention. Then the follower may take either a positive or negative reciprocal action based on the leader’s kindness.We also apply the new framework in a supply chain pricing problem to investigate the impact of the retailer’s reciprocal behavior on pricing decisions, obtaining the following interesting results. First, the supplier should take the retailer’s personality into account and offer a wholesale price based on it. Second, while the retailer can benefit from his reciprocal behavior, the supplier suffers in most cases. Finally, the retailer’s reciprocal behavior can help alleviate the double marginalization effect, and lead to a performance improvement in the whole supply chain.In addition, we also design the experiment to study the supply chain pricing decision. Based on the experimental data, we estimate the parameters of the reciprocal model proposed to verify the rationality of this model.Furthermore, to verify the rationality of the new reciprocal model, we extend this model to ultimatum game and apply it to interpret the experimental data of ultimatum game.