Strategic information flow under the influence of industry structure

Abstract

We investigate incentive-driven information flow in a setting where a monopolistic supplier sells, through two retailers, to a market with uncertain demand. Market competition is either in quantity or in price. Each retailer has a signal useful for updating demand forecast, but the supplier has no signal access. Horizontal information sharing occurs as the two retailers exchange signals, while vertical information sharing occurs as the supplier acquires the retailers’ signals with differential payments. The retailers can adopt a cooperative (competitive) regime to manage operations and information decisions jointly (independently). We demonstrate that the decision regime adopted by the retailers and market competition mode intricately influence information flow and firms’ profit performance. Adopting the cooperative regime by the retailers insulates the system from the change in the mode of market selling, which would, however, impact the strategic interplay of horizontal and vertical information sharing, producing substantial profit implications, as the retailers adopt the competitive regime. Moreover, cooperation between the retailers, despite precluding system-wide information transparency, can increase system profit gain from information flow.