Sharing Demand Information Under Bounded Wholesale Pricing

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, it misses out on certain win-win opportunities that could arise from information sharing. When the demand information shared by the retailer is used by the manufacturer to set a more advantageous wholesale price for its own benefit only, the double marginalization effect will often be exacerbated to the detriment of the retailer and even to the supply chain as a whole. Anticipating this consequence, the retailer will cautiously keep its information within its own realm of operations and forego the potential improvement that could result from sharing information with the upstream manufacturer. We propose and analyze 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 key 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 voluntarily proposes an upper bound and promises not to raise the wholesale price above this bound if the retailer agrees to share information. We show why this new mechanism can be a win-win for a single supply chain and for competing channels.