Encroachment by a better-informed manufacturer

Abstract

Many manufacturers have recently taken the initiative to enhance their demand forecasts with the help of modern data analytics tools. Motivated by this trend, this paper examines the implications of encroachment when an upstream manufacturer privately observes the demand information. We analyze a signaling game between a manufacturer and a retailer. The manufacturer privately observes the actual forecast signal of the customer’s marginal utility of a product, and then determines a wholesale price, which may signal its private information. Upon receiving the wholesale price, the retailer decides how much to sell in the retail channel. The manufacturer, if in possession of a direct channel, finally determines how much to sell in this channel. Our analysis reveals that encroachment by a better-informed manufacturer has many different implications that have not been documented in the literature. In particular, we find that compared with the prior literature focusing on a better-informed retailer, when the upstream manufacturer is better informed, encroachment will more likely result in a lose-lose outcome. Additionally, if better informed, the retailer may not opt to credibly share information. By contrast, we show that in the presence of a better-informed manufacturer, both supply chain parties are willing to establish the capability of credible information sharing unless it is too costly to do so. Interestingly, we demonstrate that a greater degree of information asymmetry or a larger direct selling cost has the potential to benefit both supply chain parties; however, more accurate information may hurt them and inhibit the manufacturer from encroachment.