Strategic Communication for Capacity Alignment with Pricing in a Supply Chain
Leon Yang Chu, Noam Shamir, Hyoduk Shin
Management Science · 2017 · Volume 63 · Issue 12
Abstract
We study a supply chain comprised of a retailer who sources a product from a manufacturer. The retailer has superior forecast information about market demand, and the manufacturer builds the capacity and sets the wholesale price prior to demand realization. We explore forecast information sharing between the retailer and the manufacturer by means of cheap talk. We show that meaningful forecast information can be shared truthfully only before the manufacturer sets both the capacity and the wholesale price. By sharing the demand forecast with the manufacturer, the retailer faces the trade-offs between inflating the forecast to convince the manufacturer to increase capacity and deflating the forecast to persuade the manufacturer to offer a lower wholesale price. When the value of forecast information sharing is high, the trade-offs are balanced, and incentives are aligned, leading to truthful information sharing. Moreover, we find that larger demand uncertainty can promote credible information sharing and, surprisingly, can benefit both firms. Finally, we demonstrate that under general distributions, in equilibrium, firms share forecasts as a form of range/interval, which has been also implemented in practice. This paper was accepted by Yossi Aviv, operations management .
Keywords
forecasting, inventory production, marketing-pricing, manufacturing: strategy, information sharing
Enable JavaScript for citation tools and additional paper interactions.