Gaining by ceding ‐ bounded wholesale pricing for information sharing in a supply chain

Abstract

The extant research on supply chain information sharing under wholesale pricing often assumes a model where the manufacturer can unilaterally set any wholesale price, and the retailer decides retail quantity or price while taking the wholesale price as given. Whereas this model may actually reflect the relative market power in some situations, its implementation misses out on certain win–win opportunities that could arise from information sharing. We propose a new wholesale pricing mechanism that promotes information sharing between a relatively weaker retailer and a more powerful manufacturer such that both parties become better off. The novel feature of the new mechanism is an extra stage of interaction, which happens before the retailer's information sharing decision: at the very outset the manufacturer and the retailer reach a contractual agreement on an upper bound which the wholesale price will not exceed if the retailer shares his information. This new, easily implementable, mechanism can be a win–win for both supply chain firms. In other words, facing market uncertainty, the manufacturer, while having the market power to dictate the wholesale price, can gain from a contractual restriction on the exercise of that power in order to induce the retailer, who is in a weaker position, to share useful demand information.