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Confidentiality and Information Sharing in Supply Chain Coordination

Yale School of Management, New Haven, Connecticut 06520, and Cheung Kong Graduate School of Business, 100738 Beijing, China
Department of Information and Systems Management, The Hong Kong University of Science and Technology, Clear Water Bay, Kowloon, Hong Kong
lode.li{at}yale.edu
imhzhang{at}ust.hk

We consider information sharing in a decentralized supply chain where one manufacturer supplies to multiple retailers competing in price. Each retailer has some private information about the uncertain demand function which he may choose to disclose to the manufacturer. The manufacturer then sets a wholesale price based on the information received. The information exchange is said to be confidential if the manufacturer keeps the received information to herself, or nonconfidential if she discloses the information to some or all other retailers. Without confidentiality, information sharing is not possible because it benefits the manufacturer but hurts the retailers. With confidentiality, all parties have incentive to engage in information sharing if retail competition is intense. Under confidentiality, the retailers infer the shared information from the wholesale price and this gives rise to a signaling effect that makes the manufacturer's demand more price elastic, resulting in a lower equilibrium wholesale price and a higher supply chain profit. When all retailers share their information confidentially, they will truthfully report the information and the supply chain profit will achieve its maximum in equilibrium.

Key Words: information sharing; confidentiality; signaling; supply chain coordination; truth telling
History: Received: November 21, 2005;