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Contracting and Information Sharing Under Supply Chain Competition

Department of Information and Systems Management, The Hong Kong University of Science and Technology, Clear Water Bay, Kowloon, Hong Kong
Department of Information and Systems Management, The Hong Kong University of Science and Technology, Clear Water Bay, Kowloon, Hong Kong
imayha{at}ust.hk
tongsl{at}ust.hk

We investigate contracting and information sharing in two competing supply chains, each consisting of one manufacturer and one retailer. The two supply chains are identical, except they may have different investment costs for information sharing. The problem is studied using a two-stage game. In the first stage, the manufacturers decide whether to invest in information sharing. In the second stage, given the information structure created in the first stage, the manufacturers offer contracts to their retailers and the retailers engage in Cournot competition. We analyze the game for two different contract types. For the case of contract menus, a supply chain that does not have information sharing will lower its selling quantities because of the negative quantity distortions in the contract menus, thus creating a strategic disadvantage in Cournot competition. The value of information sharing to a supply chain is positive, and the dominant strategy of each supply chain is to invest in information sharing when the investment costs are low. We fully characterize the equilibrium information sharing decisions under different investment costs. For the case of linear price contracts, the value of information sharing to a supply chain becomes negative, and the dominant strategy of each supply chain is not to invest in information sharing regardless of investment costs. Our results highlight the importance of contract type as a driver of the value of information sharing and the role of information sharing capability as a source of competitive advantage under supply chain competition.

Key Words: supply chain competition; incentive contracts; asymmetric information; information sharing
History: Received: January 26, 2006;