Information Sharing and Contracting Between Competing Manufacturers and Common Retailer

Abstract

We study information sharing contracts in which a privately informed retailer offers to share its demand information with the upstream competing manufacturers (suppliers) for a price. We investigate whether such information sharing contracts would ever be accepted by the manufacturers, especially when they can use alternative means, like screening contracts, to obtain the same information. For that we model a three-stage game between the retailer and the manufacturers in which the retailer first determines the optimal payment, per manufacturer, for sharing its demand information. Consequently, the manufacturers simultaneously accept or reject this offer in stage $2$ . In stage $3$ , both manufacturers simultaneously offer menus of payment-quantity contracts to the retailer, which act as screening contracts if the manufacturer(s) rejected information sharing contract previously. We fully characterize stage- $3$ contracts under common agency; the manufacturers’ stage- $2$ equilibrium; and the retailer’s stage- $1$ decision. We find that common agency can augment the reduction in competition intensity between the manufacturers. As a result, a manufacturer using screening can do better than a manufacturer accepting information-sharing even when information is free, which implies that both manufacturers might never choose information sharing in a pure strategy equilibrium for a positive information sharing price. Despite this, we find that the retailer will optimally set an information sharing price that results in both manufacturers either accepting information sharing as long as demand uncertainty is not too low, or always accepting information sharing, and that the manufacturers can end up in a prisoner’s dilemma. Managerially, our findings provide guidance to both manufacturers as well as retailers on their decisions pertaining to information sharing contracts.