When Blockchains Backfire: Information Transparency in a Vertical Relationship

Abstract

Information Technology (IT) such as blockchains, radio-frequency identification (RFID), and Internet of Things (IoT) allow firms and consumers to trace the physical flow of products along a supply chain. Although this improvement in information transparency helps enhance product safety and quality, it also provides information integration in the channel by giving an upstream manufacturer verifiable information regarding its retailer’s sales records, which are previously unknown owing to demand uncertainty. On the surface, it seems that such reductions in information asymmetry benefit the manufacturer at the expense of the retailer. Contrary to this intuition, we find that a manufacturer’s information regarding retailer’s sales can worsen double marginalization and hurt the manufacturer, the retailer, and consumers alike, thereby leading to a “lose-lose-lose” outcome. Our results caution firms and public policymakers that improving information transparency using IT can lead to unintended and potentially negative consequences.