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

Abstract

Vertical information-sharing literature in supply chains, either a bilateral chain or one supplier with multiple Cournot-competing buyers, has argued that voluntary (public) information sharing is not a Nash equilibrium. Our work argues that in some industrial settings with the presence of uncertain cash flows limiting operational investments, the revelation of accurate market demand information may influence the operational investment decisions of the supplier and alter their supply cost. Subsequently, resulting cost savings may be partially passed via wholesale prices to the buyers and overcome the harmful effects of information sharing. Our equilibrium analysis of a bilateral supply chain shows that under certain conditions, information sharing leads to supplier cost savings and reduced wholesale price for the buyer, and voluntary information sharing may be a Nash equilibrium. Our equilibrium analysis for the general setting of multiple Cournot-competing buyers continues to show that voluntary information sharing may be an equilibrium for some of the buyers, and there always exists an equilibrium that (weakly) Pareto improves all agents over the no-information-sharing outcome. Moving away from the case of buyers serving a common market, we also study multiple distinct markets, each served by one of the buyers. While for such settings, the lack of existence of a pure Nash equilibrium is likely, imposing a Stackelberg sequence, with one of the buyers serving as a leader, we are likely to end up with information sharing in the equilibrium. Surprisingly, for those cases, information sharing may prove hurtful for buyers and the whole system, but it always benefits the supplier.

Keywords: Information sharing, operational investment, cash hedging, supply chain management

JEL Classification: P45, M21