The Value of Sales Information in Repeated Vertical Relationships

Abstract

We consider a repeated relationship between a manufacturer and a retailer. Demand fluctuates in an i.i.d manner between periods. In each period, the retailer privately observes the current demand, and the manufacturer offers a menu of contracts to elicit the retailer to reveal its private information. We study the value of repeated interaction and sharing past sales information, i.e., information that allows the manufacturer to infer past demand. We find that even without sharing sales information, repeated interaction by itself enhances efficiency and profits for both firms. Past sales information further improves the channels’ efficiency and increases the manufacturer’s expected profit. Yet, past sales information increases (decreases) the retailer’s per-period expected profit when the retailer places a low (high) value on its future profits. We further find that the retailer may prefer to share imperfect information, and that ambiguity may facilitate the sharing of past sales information. Finally, we consider the case of a financially constrained retailer. Repeated interaction involves negative profits for the retailer during periods of low-demand and high profits when demand is high. Therefore, the retailer may benefit from being financially constrained, while market efficiency decreases in this case.

Keywords: vertical relations, adverse selection, relational contract

JEL Classification: L22, L42, D82