Information Sharing in a Supply Chain with Horizontal Competition: The Case of Discount Based Incentive Scheme

Abstract

Li [1] examined the incentives for information sharing in a two-level supply chain in which there are a manufacturer and many competing retailers. Li showed that direct and leakage effects of information sharing discourage retailers from sharing their information and identified conditions under which demand information sharing can be traded. The purpose of this note is to show that full information is the equilibrium if the manufacturer adopts a discount based incentive scheme instead of the side-payment scheme used by Li. The discount-based scheme eliminates the direct as well as leakage effects. Discount based scheme is attractive because similar schemes are commonly used in practice and it results in Pareto-efficient information sharing equilibrium that has a higher social welfare and consumer surplus than the no information sharing scenario. The total social benefits and consumer surplus are higher in discount based incentive scheme. Consequently, many of the key results of Li are critically dependent on the assumption that the manufacturer uses side payment for information.