Bilateral Information Sharing and Pricing Incentives in a Retail Channel

Abstract

This chapter evaluates the impact of sharing information on wholesale and retail pricing incentives as well as on the distribution of economic rents. We consider a model in which the manufacturer distributes its product to one or more retailers. Each firm receives a private signal as an estimate of stochastic consumer demand. We show that, in the absence of information sharing, the retailer is able to use the wholesale price to infer the manufacturer’s private signal. This creates a pricing distortion which benefits the retailer. Downward sharing of the manufacturer’s private signal eliminates this distortion. In contrast, when the retailer shares its private signal upstream, the manufacturer is able to set price closer to retailer’s value, thus capturing downstream consumer surplus. In general, the manufacturer benefits from more information sharing at the loss of downstream retailers and consumers. Hence, information sharing arrangements in equilibrium require side payments and/or sufficient cost savings (e.g., reduced inventory costs).