The Peril of Blockchain in a Vertical Relationship

Blockchains allow firms and consumers to trace the physical flow of products along a supply chain. Although this improvement in information transparency helps enhance product safety and quality, it also provides information integration in the channel by giving an upstream manufacturer information regarding its retailer's sales records, which are previously unknown owing to demand uncertainty. By breaking the information asymmetry between the manufacturer and retailer, blockchains seem to benefit the manufacturer at the expense of the retailer. Contrary to this intuition, we find that, a manufacturer's information regarding retailer's sales can worsen double marginalization and hurt the manufacturer, the retailer, and consumers alike, thereby leading to a "lose-lose-lose" outcome. Our results caution firms and public policymakers that the implementation of blockchains can lead to unintended consequences. Thus, we find that unlike vertical integration that resolves double marginalization, information integration can increase the intensity of channel competition making everyone worse off