Sharing Demand Information in a Value Chain: Implications for Pricing and Profitability |
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Authors: | Email author" target="_blank">Suresh?RadhakrishnanEmail author Bin?Srinidhi |
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Institution: | (1) School of Management, SM 41, University of Texas at Dallas, Richardson, TX 75083, USA;(2) City University of Hong Kong, 83 Tat Chee Avenue, Kowloon Tong, Hong Kong;(3) 312A School of Business, University at Albany, State University of New York, Washington Avenue, Albany, NY, 12222 |
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Abstract: | While it is known that information exchange (IE) in a value chain improves resource coordination, scant attention has been paid to two issues. The first issue is the effect of relative bargaining strengths of the parties on whether and how IE will be implemented. The second issue is whether a resource-based costing system is adequate to motivate the implementation of information exchange. In this paper, we model a value chain consisting of a manufacturer and a retailer, where the retailer gets (private) demand information that has the potential of improving the manufacturer s resource decisions. In this model, it is always beneficial for the value chain to implement IE. We show that in a monopsony or in a bilateral monopoly when the retailer has sufficient bargaining power, IE can be implemented if and only if the wholesale price compensates him for the loss of the information rent that he would get without IE. Using this model as the benchmark, we also examine other settings where the retailers have less bargaining power due to competition or size. In such settings, even though the retailers are better informed, the manufacturer can implement the IE regime costlessly and appropriate the information rent partially or fully. In effect, the manufacturer benefits both by improved resource coordination and by reduced payment for information rent. In all these settings, we find the retailer will not be motivated to adopt IE solely by a resource-based costing and pricing system. |
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Keywords: | supply chain information sharing game theory mechanism design |
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