Value of information with manufacturer encroachment

Abstract

We study the value of information in a supply chain where the manufacturer introduces a direct‐selling channel to encroach in the retailer's market. Based on different information structures regarding the direct‐selling cost for the manufacturer, we analyze three models: incomplete information model, asymmetric information model, and full information model. By comparing the firms' profits in these models, we derive the value of the manufacturer's information acquisition and the value of sharing that information with the retailer. We find that the manufacturer's information acquisition may hurt the manufacturer but benefit the retailer simultaneously. However, we also find a win–win outcome for the manufacturer and the retailer due to the manufacturer's learning of its direct‐selling cost. Further, in expectation, the manufacturer always benefits from sharing its private cost information with the retailer, while the retailer does not. We also show that the direct‐selling channel is always valuable to the manufacturer, while the retailer's preference will depend on the information structure. Finally, we consider a supply competition model where the manufacturer competes with a spot supply source to sell to the retailer. In contrast to the case of no supply competition, the manufacturer sells less using direct selling. However, direct selling can become more valuable as it may contribute higher profit for the manufacturer due to the reduced wholesale price charged to the retailer. We find that supply competition can completely reverse the manufacturer's disincentive into incentive for information acquisition and facilitate information sharing with the retailer.