Observability of retailer demand information acquisition in a dual-channel supply chain

Abstract

This study considers a retailer’s optimal endogenous demand information acquisition format decision in a dual-channel supply chain setting. Two information acquisition formats are examined, depending on whether the outcome of information acquisition is observable to the manufacturer. We explicitly characterize the manufacturer’s optimal contract provision under each acquisition format, and derive the retailer’s optimal endogenous information acquisition format choice. Two underlying driving forces for the retailer’s preference for the observable acquisition are derived. On one hand, observable acquisition makes the retailer lose some informational advantage, which is detrimental to the retailer. On the other hand, observable acquisition may alleviate the ordering quantity distortions, which is beneficial to the retailer. In equilibrium, we show that the retailer with an inferior acquisition capability might be pleased to choose observable acquisition when the market dispersion is in the middle range. Although the manufacturer consistently obtains more profit under observable acquisition, the supply chain may still prefer unobservable acquisition because the observability of information acquisition may aggravate double marginalization under certain conditions. Moreover, the introduction of the direct sales channel may dampen the retailer’s incentive to choose the observable acquisition format.