For better or worse: Impacts of information leakage by a common supplier with innovation imitation of downstream firms

Abstract

This paper considers a supply chain structure where an incumbent and an entrant order a critical component sequentially from a common supplier. The incumbent introduces an innovative product whose innovation value is its private information, and the entrant strategically chooses to either imitate the incumbent’s innovation at a cost or introduce a regular product without imitation. The supplier can choose whether or not to leak the incumbent’s order quantity to the entrant. This paper theoretically investigates the interplay between information leakage and innovation imitation, and examines the impacts of information leakage on the channel entities. We find that the entrant always imitates the innovation when the imitation cost is low, and imitation benefits the supplier but damages the incumbent. In the absence of incumbent’s quantity distortion, the supplier is more likely to leak the information except when the entrant’s imitation cost is moderate and the imitation ability is strong; however, its willingness to abandon information leakage increases in the presence of quantity distortion. Different from previous studies, our results suggest that quantity distortion enables a win–win–win outcome for supply chain members, all of whom have consistent preferences on information leakage. Besides, an information sharing agreement can be achieved between the incumbent and the entrant, which is beneficial to the supplier as well.