Private Demand Information Research Articles

Capacity Allocation over a Long Horizon: The Return on Turn-and-Earn

We consider a supply chain in which a supplier sells products to multiple retailers. When orders from the retailers exceed the supplier's capacity, she must employ an allocation mechanism to balance supply and demand. In particular, we consider a commonly used allocation scheme in the automobile industry: turn-and-earn, which uses past sales to allocate capacity. In essence, retailers “earn” an allotment of a vehicle after they sell one. In contrast to turn-and-earn, fixed allocation ignores past sales and gives each retailer an equal share of the capacity. Earlier work has demonstrated that turn-and-earn induces more sales in a two-period setting compared to fixed allocation. The question remains unanswered whether turn-and-earn induces similar behaviors over a long horizon when retailers possess private demand information. We construct a dynamic stochastic game of order competition over an infinite horizon to track the order dynamics of the supply chain. We obtain a richer set of equilibrium behaviors than existing models predict. Instead of a symmetric allocation outcome, we observe that sales leadership may arise in equilibrium and that retailers with different past sales adopt distinct ordering strategies to respond to demand uncertainty. Transient sales dynamics suggest that sales leadership may not be persistent and can be eliminated by the occurrence of extremely low demand. This provides a theoretical explanation for several behavioral observations of some U.S. automobile dealers. In addition to the sales-inducing effect, interestingly, turn-and-earn also causes the retailers to absorb local demand variability.

Strategic Information Sharing in Competing Supply Chains

This study investigates strategic information sharing in supply chains where a retailer can ex post decide whether to share private demand information with an upstream manufacturer after the content of information becomes known. We highlight the equilibrium interaction between the retailer’s incentive to induce lower wholesale prices through strategic information sharing and the manufacturer’s rational inference about the retailer’s optimal disclosure strategy. We find that the retailer should share more information when his capability to acquire information improves. However, the retailer may not always want to pursue perfect information capability even when doing so does not incur any direct cost. In addition, we find that retailers should disclose less information when the market becomes more competitive. We also examine the role of inter-chain externality in the firms’ profitability and the retailers’ efforts to improve information capability. In particular, we show that firms can benefit from the rival retailer’s efforts to improve information capability, and a retailer’s incentive for information capability improvement can increase with the intensity of competition or with the rival retailer’s information capability.

Supply Chain Performance Under Market Valuation: An Operational Approach to Restore Efficiency

Based on a supply chain framework, we study the stocking decision of a downstream buyer who receives private demand information and has the incentive to influence her capital market valuation. We first characterize a market equilibrium under a general, single buyback contract. We show that the buyer's stocking decision can be distorted in equilibrium. Such a downstream stocking distortion hurts the buyer firm's own performance, and it also influences the performances of the supplier and the supply chain. We further reveal scenarios where full supply chain efficiency cannot be reached under any single buyback contract. Then, focusing on contract design, we characterize conditions under which a menu of buyback contracts can prevent downstream stocking distortion and restore full efficiency in the supply chain. Our study demonstrates that in a supply chain context, a firm's incentive to undertake real economic activities to influence capital market valuation can potentially be resolved through operational means.This paper was accepted by Yossi Aviv, operations management.

Supply Chain Performance under Market Valuation: An Operational Approach to Restore Efficiency

Based on a supply chain framework, we study the stocking decision of a downstream buyer who receives private demand information and has the incentive to influence her capital market valuation. We first characterize a market equilibrium under a general single contract offer. We show that the buyer’s stocking decision can be distorted from the first-best level in equilibrium. Such a downstream stocking distortion is always detrimental for the buyer but might benefit (or hurt) the supplier and the supply chain for some contract terms. We further reveal scenarios where full supply chain efficiency cannot be reached under any single contract offer. Then, focusing on contract design, we show a general condition under which a menu of buyback contracts can prevent downstream stocking distortion and restore full efficiency in the supply chain in equilibrium. Our study demonstrates that in a supply chain context, a firm’s incentive to take real economic activities to influence capital market valuation can potentially be resolved through operational means.

Channel incentives in sharing new product demand information and robust contracts

Demand for a new product is often highly uncertain. As the developer of a new product, the manufacturer may reduce the uncertainty of the product’s demand through observing progress in his product development process or receiving demand signals directly from customers. This paper first shows that a centralized channel always benefits from improved demand information. Yet, to realize this benefit in a decentralized manufacturer–retailer channel, the manufacturer needs to disclose his private demand information to the retailer. We show that the manufacturer’s incentive to share his improved demand information depends on the supply contract signed with the retailer. Furthermore, mandating the manufacturer to disclose his improved demand information can actually reduce the total channel profit. We provide managerial insights by analyzing three widely used contract forms. We investigate whether these contracts are robust under an unanticipated demand information update observed by the manufacturer. We show that the quantity flexibility contract with a high return rate is not robust. The buyback contract, however, is robust and always achieves information sharing while preserving channel performance.

Incentive Schemes for Semiconductor Capacity Allocation: A Game Theoretic Analysis

We study incentive issues that arise in semiconductor capacity planning and allocation. Motivated by our experience at a major U. S. semiconductor manufacturer, we model the capacity‐allocation problem in a game‐theoretic setting as follows: each product manager (PM) is responsible for a certain product line, while privately owning demand information through regular interaction with the customers. Capacity‐allocation is carried out by the corporate headquarters (HQ), which allocates manufacturing capacity to product lines based on demand information reported by the PMs. We show that PMs have an incentive to manipulate demand information to increase their expected allocation, and that a carefully designed coordination mechanism is essential for HQ to implement the optimal allocation. To this end, we design an incentive scheme through bonus payments and participation charges that elicits private demand information from the PMs. We show that the mechanism achieves budget‐balance and voluntary‐participation requirements simultaneously. The results provide important insights into the treatment of misaligned incentives in the context of semiconductor capacity‐allocation.

Sharing Demand Information in a Value Chain: Implications for Pricing and Profitability

While it is known that information exchange (IE) in a value chain improves resource coordination, scant attention has been paid to two issues. The first issue is the effect of relative bargaining strengths of the parties on whether and how IE will be implemented. The second issue is whether a resource-based costing system is adequate to motivate the implementation of information exchange. In this paper, we model a value chain consisting of a manufacturer and a retailer, where the retailer gets (private) demand information that has the potential of improving the manufacturer’s resource decisions. In this model, it is always beneficial for the value chain to implement IE. We show that in a monopsony or in a bilateral monopoly when the retailer has sufficient bargaining power, IE can be implemented if and only if the wholesale price compensates him for the loss of the information rent that he would get without IE. Using this model as the benchmark, we also examine other settings where the retailers have less bargaining power due to competition or size. In such settings, even though the retailers are better informed, the manufacturer can implement the IE regime costlessly and appropriate the information rent partially or fully. In effect, the manufacturer benefits both by improved resource coordination and by reduced payment for information rent. In all these settings, we find the retailer will not be motivated to adopt IE solely by a resource-based costing and pricing system.

VERTICAL INFORMATION EXCHANGE IN A SUPPLY CHAIN WITH DUOPOLY RETAILERS

We consider a supply chain with one manufacturer in the upstream and two competing retailers in the downstream. The retailers sell differentiated goods and are endowed with some private demand information. The paper shows that the manufacturer's optimal strategy is independent of the type of downstream competition, Cournot or Bertrand, and that no information will be shared with the manufacturer on a voluntary basis. However, complete information sharing, which benefits all three parties, can be achieved through side payment when the retailers' information is statistically less accurate or when the leakage effect is more beneficial to the retailers.

Asymmetric Information, Incentives and Price-Cap Regulation

A regulatory incentive mechanism is presented in which the regulated firm has superior information about both cost and demand, compared to the regulator. The mechanism leads to truthful revelation of the demand function and extracts all rents due to private demand information in a nondistorting way. The scheme assumes that the regulator can observe lagged expenditures by the firm. This mechanism leads to efficient pricing, operating, and investment behavior by the firm. Finally, it is shown that the mechanism is closely related to recent proposals for price-cap regulation and that under certain assumptions simple modifications of these proposals will lead to the mechanisms discussed herein.