Transparency of Information Acquisition in a Supply Chain

A firm hires a consultant to acquire demand information. The outcome of information acquisition may turn out to be successful such that the firm learns much about the market demand, thus becoming “informed,” or unsuccessful such that it learns very little about the market demand, thus remaining “uninformed.” After the outcome becomes clear, the firm knows its information status, informed or uninformed, and the information content if informed. The client firm usually requires strict confidentiality that forbids the consultant to make any disclosure about the information acquisition, believing that greater informational advantage will surely be to its own benefits. As a result, neither the information content nor the information status is known to any third party. But should the firm always care so much about strict confidentiality? Will it be beneficial if the firm's information status, but not the information content, is known to its partners or any other firms? We investigate this issue in the context of a two-tier supply chain. A manufacturer offers a menu of contracts for supplying a product to a retailer who sells it in a market with random demand that has a known continuous distribution. The retailer hires a consultant to acquire demand information, with uncertain outcome. With probability t, the retailer becomes informed about the market demand, and with probability 1 − t, he remains uninformed, where the probability t can be regarded as representing the retailer's information acquisition capability. We find that disclosing its information status benefits the retailer if its information acquisition capability is less than stellar and the market variability is intermediate. Our investigation shows that there are benefits that are foregone by following strict confidentiality but can potentially be recovered by switching to a policy of partial confidentiality.