Incentives for Information Transparency Under Vertical Information Asymmetry

Posted: 21 Aug 2016

See all articles by He Huang

He Huang

Chongqing University

Sammi Tang

University of Miami

Hongyan XU

Chongqing University - School of Economy and Business Administration

Date Written: August 18, 2016

Abstract

How to deal with information asymmetry is an important issue under various scenarios in operations management. In supply chain competition, asymmetric information usually exists either between chains horizontally or within chains vertically, or both. This paper studies the incentives for horizontal information transparency between competing downstream firms when upstream suppliers possess private information. The information asymmetry is modeled along two dimensions: vertical information on supply reliability and horizontal information on production costs. Horizontal transparency introduces two consequences usually: better understanding of competitor information and supplier switching option. The transparency generates two benefits: internal vertical effect and external vertical effect, when the option of supplier switching is not available. We thus show that horizontal transparency always benefits the manufacturers and the benefit becomes greater in the presence of vertical information asymmetry, which conveys an important message that the primary relationship between two dimension information is substitutability. When the switching option is available, we find that the manufacturer always suffers from detriment information effect of switching, although the switching reduces the uncertainty of its competitor’s vertical information. Because of this detriment effect and cost transition effect generated by switching, in contrast to conventional wisdom of one-echelon competition and the model without switching, opaqueness might be preferred by the manufacturers. In particular, the basic interplay of two dimensional information is either substitutability or complementarity, driven by the balance of above effects. Our findings enrich the understanding of horizontal information sharing under vertical information asymmetry and provide novel insights for managers to handle two dimensional information asymmetry.

Keywords: information transparency; asymmetric information; supply reliability; competition

JEL Classification: D43; D82

Suggested Citation

Huang, He and Tang, Sammi and XU, Hongyan, Incentives for Information Transparency Under Vertical Information Asymmetry (August 18, 2016). Available at SSRN: https://ssrn.com/abstract=2825818

He Huang

Chongqing University ( email )

Shazheng Str 174, Shapingba District
Chongqing 400044, Chongqing 400030
China

Sammi Tang

University of Miami ( email )

5250 University Dr
Jenkins 414H
Coral Gables, FL 33146
United States
3052842810 (Phone)

Hongyan XU (Contact Author)

Chongqing University - School of Economy and Business Administration ( email )

No.174 Shazhengjie
Shapingba
Chongqing, Chongqing 400044
China

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