Distribution and Equitable Sharing of Value From Information Sharing Within Serial Supply Chains

Abstract

This paper studies the incentive issues that arise when firms in a multilevel supply chain create value jointly by investing in information sharing. We consider three types of information sharing: (1) supply-chain-wide information sharing; (2) downstream information sharing; and (3) upstream information sharing. We showed that the value of information sharing is higher for the upstream firms than for downstream firms regardless of information sharing type. Furthermore, the value of information sharing for any firm is higher under downstream information sharing than upstream information sharing, and the incremental value of information sharing to a firm decreases when more downstream firms share information. Therefore, if there is a cost associated with information sharing, then upstream firms have an incentive to free ride on downstream firms' information sharing efforts. These results suggest that serious incentive misalignments may impede supply-chain-wide information sharing, even though it maximizes the value to the supply chain, and that a mechanism to distribute the overall surplus equitably may become essential. If a contract distributes the surplus according to each firm's incremental contribution to it, then firms that are in the middle levels of the supply chain receive a higher share than those that are in either end of the supply chain. That is, interestingly, neither the firm that possesses the information that is propagated throughout the supply chain by information sharing nor the most upstream firm realizes the highest value from information sharing obtains the maximum share of the surplus generated under such a contract.