Public Forecast Information Sharing in a Market with Competing Supply Chains

Abstract

Studying the operational motivation of a retailer to publicly announce his forecast information, this paper shows that by making forecast information publicly available to both his manufacturer and to the competitor, a retailer is able to credibly share his forecast information - an outcome that cannot be achieved by merely exchanging information within the supply chain. We model a market comprised of an incumbent supply chain facing the possible entry of a competing supply chain. In each supply chain, a retailer sources the product from a manufacturer, and the manufacturers must secure capacity prior to the beginning of the selling season. Due to the superior knowledge of the incumbent retailer about the consumer market, he privately observes a forecast signal about consumer demand. We first show that the retailer cannot credibly share this forecast information only with his manufacturer, since regardless of the observed signal, the retailer has an incentive to induce the manufacturer to secure a high capacity level. However, when the information is also shared with the competitor, the incumbent retailer faces the trade-off between the desire to secure an ample capacity level and the fear of intense competition. By making information publicly available, it is possible to achieve truthful information sharing; an incumbent retailer observing a high forecast benefits from the increased capacity level to such an extent that he is willing to accommodate competition to prove his accountability for the shared information. On the other hand, an incumbent retailer with a low forecast is not willing to accommodate competition in exchange for the high level of capacity; thus, he truthfully reveals his low forecast to deter competition. Moreover, we demonstrate that this public information sharing can benefit all the firms in the market as well as consumers. In addition, we show that compared to the advance purchase contract, all the firms except the incumbent manufacturer can be better off using public information sharing with a simple wholesale price contract.