Information visibility and its impact in a supply chain

We model the impact of information visibility in a two-level supply chain consisting of independent retailers who share upstream supply. The manufacturer supplies similar products to the two retailers and each retailer serves its independent end market. Retailers face one period of stochastic demand and can satisfy the demand by ordering in the first period or back-ordering some of the demand and satisfying it in the second period. The wholesale price in the second period is decreasing in the total order size, across the two retailers, in the first period. This decrease in wholesale price captures the market learning effect of aggregate orders that has been extensively documented in the empirical literature. We use a game-theoretic framework to investigate the ex ante incentives for the retailers to share their private demand information. We show that: (1) the two retailers have no incentives to share information about their private values when equilibrium order quantities are interior i.e., the order size is between zero and the demand: (2) one retailer who unilaterally discloses more information to his competitor may make himself better off while making his competitor worse off, if some order quantities are on the boundary; and (3) partial information sharing may be the equilibrium strategy for retailers. This paper thus identifies conditions under which different levels of information sharing may be the equilibrium outcomes in a supply chain.