Strategic Communication for Capacity Alignment with Pricing in a Supply Chain

42 Pages Posted: 16 Oct 2011 Last revised: 9 Aug 2013

See all articles by Leon Yang Chu

Leon Yang Chu

University of Southern California - Marshall school of Business

Noam Shamir

Tel-Aviv University

Hyoduk Shin

University of California, San Diego (UCSD) - Rady School of Management

Date Written: August 8, 2013

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 up 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 capacity and the wholesale price. By sharing demand forecast with the manufacturer, the retailer faces the tradeoffs between inflating the forecast in order 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 tradeoffs 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.

Keywords: information sharing, supply chain management, cheap talk

Suggested Citation

Chu, Leon Yang and Shamir, Noam and Shin, Hyoduk, Strategic Communication for Capacity Alignment with Pricing in a Supply Chain (August 8, 2013). Available at SSRN: https://ssrn.com/abstract=1944668 or http://dx.doi.org/10.2139/ssrn.1944668

Leon Yang Chu

University of Southern California - Marshall school of Business ( email )

Marshall School of Business
BRI 401, 3670 Trousdale Parkway
Los Angeles, CA 90089
United States

Noam Shamir

Tel-Aviv University ( email )

P.O. Box 39010
Ramat Aviv, Tel Aviv, 69978
Israel

Hyoduk Shin (Contact Author)

University of California, San Diego (UCSD) - Rady School of Management ( email )

9500 Gilman Drive
Rady School of Management
La Jolla, CA 92093
United States

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