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•A behavioral model to investigate fairness concerns in a dyadic supply chain.•Nash bargaining solution as fairness criterion in the option contract context.•Derives equilibrium ordering/pricing decisions of supply chain.•Numerical analysis to illustrate and analyze the results.
Option contracts are widely used in practice and can be employed to achieve channel coordination. However, limited research work has been reported on option contracts, which considers the influence of decision-makers’ behavior on their optimal pricing/ordering strategies and the overall supply chain performance. Hence, in the present study, we investigate the fairness concerns of the channel members in a two-echelon supply chain, composed of single supplier and single retailer, wherein the retailer procures products from the supplier using the option contract. A behavioral model of fairness has been developed by using Nash bargaining solution (NBS) as the fairness reference while formulating the utility functions of the channel members. The supplier-led Stackelberg game framework is adopted and the equilibrium values are derived. The results demonstrate that under certain conditions on the pricing parameters, the supply chain under the channel member’s fairness concerns can be coordinated through option contract. However, irrespective of the channel members being fairness-concerned, when the channel is coordinated, the supplier cannot realize its optimal pricing policy. Additionally, the stronger fairness concern of retailer and the mild fairness concern of supplier leads the channel to approach the pricing policy of the coordinated channel. Furthermore, the fairness sensitivity of the retailer/supplier has a positive/negative impact on the overall supply chain performance. The results are demonstrated with the help of a numerical example.