The Impact of Capacity Information on Supplier Encroachment

Abstract

In today's complex business environment, conflicting relationships among firms are becoming the norm. Firms can be supply chain partners, but at the same time, they can be competitors. Moreover, capacity is often limited. Prior research has examined this problem in a perfect information setting, but in reality, a supplier often has private information in its own capacity. We consider a signaling game in which the supplier has private information in its own capacity. The supplier first sets the wholesale price. The buyer then decides on the order quantity, and the supplier decides whether or not to encroach on the end-customer market. We find that the supplier can be worse off while the buyer can be better off from the supplier's private information on capacity.Moreover, when the capacity information is private, it is more likely for a supplier to encroach on the end-customer market. Our paper also shows that capacity withholding is less likely when information is asymmetrical. Finally, we find that both firms can simultaneously benefit from the supplier's capacity constraint. Our paper demonstrates that keeping information on the capacity level private can be harmful, so the supplier should find ways to disclose its capacity information credibly (e.g., by using Electronic Data Interchange (EDI) or linking its database with the buyer). However, the buyer should be cautious about adopting these technologies. Furthermore, not having information about supplier capacity not only increases the possibility of supplier encroachment, but also makes strategic inventory (capacity withholding) less important.