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

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.