Abstract: Recognizing the importance of fairness as well as the prevailing practice of telecom service and handset bundling in modern wireless businesses, the effects of the handset manufacturer's fairness concerns on the pricing and subsidy policy, the profit distribution, and the coordination of subsidy contract under a handset manufacturer-Stackelberg structure are examined in this paper. Specifically, a setting in which a telecom service operator cooperates with a handset manufacturer to deliver the complementary telecom service and handset to end consumers is considered. The handset manufacturer acts as a Stackelberg leader, and sets the handset retail price, while the service operator responds by setting the subsidy as a Stackelberg follower. This problem is modeled and solved based on the game theoretical paradigm. First, the equilibrium strategies and equilibrium profits for the centralized model and subsidy contract model are presented, respectively. Then, the effects of fairness concerns of the handset manufacturer on the equilibrium strategies of the handset manufacturer and the service operator, the channel members' profits, and the overall profit are analyzed. Furthermore, the channel coordination issue for the subsidy contract is investigated. The results show that the disadvantageous inequality aversion will promote the handset manufacturer to set a relatively higher retail price, and thus lead a deterioration of the overall performance. And the advantageous inequality aversion will promote the handset manufacturer to set a relatively lower retail price, and thus improve the overall performance. However, the channel coordination can not be achieved no matter the handset manufacturer cares about fairness or not. Besides, the results also show that blindly pursuing a high distributed ratio will not necessarily increase the handset manufacturer's profit and will reduce the overall profits. These results indicate that it is important to consider the fairness issue in telecom service and handset bundling, especially for the situation when a handset manufacturer cooperates with a relative disadvantageous service operator.

Key words: telecom service, handset bundling, distribution channel, fairness concerns, Stackelberg game