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

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.