Vertical Information Sharing in the Presence of Investment Shocks: When May It Happen?

Abstract

We study the interplay between firms’ information sharing behaviors and cash hedging strategies in supply chains. First, we argue that if an information-sharing channel is built up to guide supplier’s cash hedging strategies, then voluntary market information sharing from retailer to supplier may take place when information rent on cost reduction effect of hedging, i.e., the effect of reduced expected cost attained by a more informed supplier via cash hedging outweighs the summation of information rent on flexibility loss of hedging, i.e., the effect of losing contingent production opportunity by a more informed supplier after cash hedging, and wholesale cost of information sharing, i.e., more exploitative wholesale price by a more informed supplier. Second, we find that for homogeneous Cournot-competing retailers, asymmetric information-sharing outcomes could emerge as equilibrium, and building up an information-sharing channel typically will not hurt, and sometimes it can achieve Pareto improvement of the supply chain and consumer welfare. Third, when a single supplier serves multiple markets, the heterogeneity across market sizes and the correlation among market shocks play big roles in shaping the equilibrium. Especially in a simultaneous information-sharing game, greater market size heterogeneity, and negatively correlated market shocks are more likely to result in the nonexistence of pure Nash equilibrium. When the Stackelberg sequence is introduced, greater market size heterogeneity and positively correlated market shocks are more likely to induce information sharing in the equilibrium. Furthermore, in the multi-market setting, the existence of an information-sharing channel could hurt retailers, the system as a whole, and consumer welfare.