Confidentiality and Information Sharing in Supply Chain Coordination

This paper is concerned with confidentiality of vertical information sharing in a supply chain consisting of one manufacturer in the upstream and two or more retailers in the downstream engaging in a Bertrand competition. Each retailer has some private information about the uncertain demand and may choose to disclose it to the manufacturer with or with out a confidentiality agreement. We consider three information scenarios with varying degrees of confidentiality and show that a higher degree of confidentiality makes the manufacturer worse off, the retailers better off, and the whole supply chain better off. Furthermore, although retailers have no incentive to publicly disclose their information, both retailers and the manufacturer will have incentives to sign agreements and engage in confidential information sharing when the retailer competition is sufficiently intense. When information is shared confidentially, the retailers will infer the shared information from the manufacturer's wholesale price, and this signaling effect makes the manufacturer's demand more price elastic and results in a lower equilibrium wholesale price. When all retailers share their information confidentially, the manufacturer's price coordinates the supply chain in the sense that the equilibrium outcome of the supply chain is Pareto optimal. We also show that confidentiality of information sharing does not affect the inventory cost if the manufacturer has an option of making to stock. Furthermore, a higher intensity of retailer competition increases the variability of demand in the upstream market while information sharing reduces it.