Platform’s Information Sharing Strategy in a Supplier Encroachment Context With Scale Economies

21 Pages Posted: 11 Oct 2022

See all articles by Pengwen Hou

Pengwen Hou

Tianjin University of Finance and Economics

Hubert Pun

Ivey Business School

Jun Wang

Tianjin University of Finance and Economics

Date Written: September 1, 2022

Abstract

We consider a supply chain in which an original brand manufacturer (OBM) outsources the production to a contract manufacturer (CM), who encroaches the end-customer market with a competing product. The CM’s production cost can benefit from economies of scale. Both the OBM and the CM sell their product through a common online platform. The platform has accurate market demand information; to assist the CMs to meet demand, the platform determines whether or not to share this information privately with the CM. When it does, a signaling game between the OBM and the CM arises because the CM has more (private) information than the OBM. Unlike a typical signaling game, in our model, we show that each type of CM may have an incentive to mimic the other type. This is driven by the CM’s two opposite drivers: wants the OBM to order more to achieve scale economies, vs. wants the OBM to order less to reduce competition at the end-customer market. Our results show that these two drivers cause information sharing between the platform and the CM happens at two distinct regions. We also find that information sharing may lead to lower demands and higher prices, and customers and social welfare may suffer as a result. Lastly, due to this information sharing option, we demonstrate how scale economies can hurt the platform, the CM and the OBM. Hence the managerial implication of our paper is that while the intention of the platform is to assist the CM to meet demand, the information sharing option may backfire. Hence, policy makers should be cautious when regulating this new business phenomenon.

Keywords: emerging market operations, platform supply chain, scale economies, signaling game, supplier encroachment

JEL Classification: M11, L6

Suggested Citation

Hou, Pengwen and Pun, Hubert and Wang, Jun, Platform’s Information Sharing Strategy in a Supplier Encroachment Context With Scale Economies (September 1, 2022). Available at SSRN: https://ssrn.com/abstract=4206694 or http://dx.doi.org/10.2139/ssrn.4206694

Pengwen Hou

Tianjin University of Finance and Economics ( email )

Tianjin
China

Hubert Pun (Contact Author)

Ivey Business School ( email )

1151 Richmond Street North
London, Ontario N6A 3K7
Canada

Jun Wang

Tianjin University of Finance and Economics ( email )

Tianjin
China

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