Deterrence effect of risk aversion information sharing on supplier encroachment

Abstract

This paper investigates the incentive of a fashion retailer to share her risk aversion information unde[r potential supplier encroachment. In fashion industries, retailers tend to be risk averse when facing uncertain market demand and the threat of supplier encroachment. Although conventional wisdom suggests that a risk-averse retailer should not expose her risk concerns to the upstream supplier, our results show that the retailer may voluntarily share private risk aversion information ex ante to deter supplier encroachment when her selling cost advantage is in an intermediate range, or trade information for some side payment when her cost advantage is small. However, when the retailer’s cost advantage is large or the supplier ex ante encroaches on the market, the retailer will never divulge private information regardless of whether the supplier offers a side payment. Moreover, we examine the retailer’s incentive for information disclosure from an ex post perspective. Specifically, when the supplier’s selling cost is either high or low, the unobservability of information acquisition enables the retailer to selectively withhold unfavourable risk aversion information; otherwise, the firms are engaged in a tacit bargaining, and their efforts to reach a consensus thwart the supplier’s incentive for encroachment.