Information Liability: A Capacitated Supplier Encroaches on a Less Informed Buyer

51 Pages Posted: 10 Jul 2019

See all articles by Hamid Elahi

Hamid Elahi

University of Western Ontario, Richard Ivey School of Business, Students

Hubert Pun

Ivey Business School

Salar Ghamat

Lazaridis School of Business and Economics

Date Written: June 26, 2019

Abstract

In today’s complex business environment, conflicting relationships among firms are becoming the norm. Firms can be supply chain partners, but at the same time, they can be competitors. Moreover, capacity is often limited, leaving the supplier facing the dilemma of whether to reserve capacity for itself or supply to the buyer. Prior research has examined this problem in a perfect information setting, but in reality, a supplier often has private information on its own capacity. Accordingly, we consider a signaling game in which the supplier has private information on its own capacity. The buyer decides on the order quantity and the supplier decides whether or not to encroach on the end-customer market. We find that the supplier can be worse off while the buyer can be better off from the supplier’s private information on capacity. Therefore, our paper demonstrates that trade secrets (private information on capacity level) can be harmful, so the supplier should find ways to disclose its capacity information credibly (e.g., by using Electronic Data Interchange (EDI) or linking its database with the buyer). However, the buyer should be cautious with adopting these technologies. Our paper also shows that capacity withholding is less likely when information is asymmetrical. Further, we demonstrate that the supplier may no longer encroach on the end-customer market when it has more capacity. Lastly, we find that both firms can simultaneously benefit from the supplier’s capacity constraint.

Keywords: asymmetric information, limited capacity, signaling, supplier encroachment, withholding

JEL Classification: L1

Suggested Citation

Elahi, Hamid and Pun, Hubert and Ghamat, Salar, Information Liability: A Capacitated Supplier Encroaches on a Less Informed Buyer (June 26, 2019). Available at SSRN: https://ssrn.com/abstract=3410177 or http://dx.doi.org/10.2139/ssrn.3410177

Hamid Elahi

University of Western Ontario, Richard Ivey School of Business, Students ( email )

London, Ontario
Canada

Hubert Pun (Contact Author)

Ivey Business School ( email )

1151 Richmond Street North
London, Ontario N6A 3K7
Canada

Salar Ghamat

Lazaridis School of Business and Economics ( email )

Waterloo, Ontario N2L 3C5
Canada

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