Pricing and horizontal information sharing in a supply chain with capacity constraint

Abstract

This paper aims to explore manufacturers horizontal information sharing strategy under competition. The model framework is based on a two-echelon supply chain composed of one upstream supplier and two downstream manufacturers with asymmetric capacity constraint. Analysis of the model establishes manufacturers’ information sharing strategies under different conditions and shows how supplier’s pricing decision can shape manufacturers’ information sharing incentives.

Introduction

In the supply chain literature on vertical information sharing in the presence of downstream competition, the general conclusion is that information sharing by downstream competing manufacturers will harm themselves but benefits the upstream supplier. Thus, downstream manufacturers have no incentives to share information with the upstream supplier (Li [10] and Zhang [18]). The present study focuses only on horizontal information sharing among downstream manufacturers and aims to explore its interaction effect on different players in the supply chain.

Intuitively, the expected profit of a firm should increase when the information visibility to the supply chain is high. Many studies on operations management focus on the value of vertical information sharing. Examples of these works are Lee et al. [8], Aviv and Federgruen [1], Cachon and Fisher [2], and Gavirneni et al. [6]. The findings of this considerable research show that vertical information sharing results mainly in improved inventory allocation, low safety stock and shortage costs, fast and low-cost order processing. Theoretical research on information sharing in an oligopoly was pioneered by Novshek and Sonnenschein [11], Clarke [3], Gal-Or [[4], [5]], Li [9], Raith [12], and Vives [[15], [16]]. Novshek and Sonnenschein [11], Clarke [3], and Gal-Or [4] analyze the Cournot game with uncertain demand conditions, while Gal-Or [6] and Shapiro [14] consider the Cournot game with uncertainty about each firm’s private production cost. Li [9] studies the incentives for Cournot oligopolists to share information about a common parameter (demand intercept) or about a firm-specific parameter (individual production costs). The results show that no sharing is the unique equilibrium when uncertainty is about a common parameter, and full sharing is unique when uncertainty is regarding a firm-specific parameter. Raith [12] shows that the equilibrium outcome of information sharing reaches two extreme points: no information sharing or full information sharing, depending on the competition type (i.e., Cournot or Bertrand) and the product type (i.e., complement or substitute). Vives [15] analyzes two types of duopoly information equilibrium, Cournot and Bertrand, which emerge from quantity and price competition, and shows that if the good are substitutes (not) sharing information is a dominant strategy for each firm in Bertrand (Cournot). Vives [16] concludes that firms in Cournot competition with a homogeneous product receive no incentives to share their private information about a common value. However, Wu [17] studies the incentive effect of information sharing based on Cournot duopoly model with capacity constraints. The results show that a duopoly at the same level does not share the demand and cost information when the capacity is unlimited. However, if the capacity is constrained, then the incentive direction of information sharing strategy may be adverse, such that the duopoly chooses full information sharing or partial information sharing to obtain high profit. However, that research does not consider the interaction between the supplier and manufacturers, which is the main focus in current research.

The benefits of vertical information sharing in supply chains are obvious and intuitive, whereas the effects of information sharing among horizontal competitors are unclear. Li [10] is the first to consider the incentives of vertical information sharing with horizontal competition. He investigates two effects of information sharing: “direct effect” and “leakage effect”. Zhang [18] shows that the manufacturer’s optimal strategy is independent of the type of downstream competition, Cournot or Bertrand, and that no information will be shared with the manufacturer on a voluntary basis. Jain et al. [7] relaxes the key assumption made in both Li [10] and Zhang [18] that retailers truthfully report information and the manufacturer does not distort the wholesale price. The analysis of differential pricing with a fixed payment provides interesting observations regarding the relationship between product substitutability, number of retailers, information precision, and market power. Shang et al. [13] study the problem of information sharing in a supply chain with two competing manufacturers selling substitutable products through a common retailer. The analysis shows that the retailers’ incentive to share information depends on non-linear production cost, competition intensity, and whether the retailer can offer a contract to charge a payment for the information.

The current study is based on a two-echelon supply chain setting with one upstream supplier and two downstream manufacturers. A distinguished feature of the model is that manufacturers are asymmetric in capacity constraints. We focus on the effect of capacity constraint on manufacturers’ information sharing strategy under competition. The key finding is that profits of supplier and the manufacturer with capacity constraint increase with respect to the capacity, whereas the profit of the manufacturer without capacity constraint is non-linear in competitor’s capacity constraint with an overall decreasing trend. In addition, given various levels of manufacturer’s capacity, upstream supplier can always take its pricing as a powerful tool to affect its downstream players’ information sharing strategy to maximize its own profit.