Impacts of information reliability in a supply chain with market disruption risks

Abstract

Abstract In this study, we develop a supply chain model with one manufacturer and one retailer, where the market demand might be subject to disruption and neither the manufacturer nor the retailer can perfectly predict whether this market disruption will occur ex ante. However, the retailer can resort to his information system to acquire more accurate disruption information than the manufacturer, and this disruption forecast information is the retailer's private information. Under this framework, we first derive the optimal outcomes of two representative categories of contract formats (i.e., the simplest but most widely used wholesale price contract, and the most sophisticated but rarely implemented menu of contracts), and then examine the impacts of the reliability of the retailer's private information about the market state (regular or disruption) on the supply chain performance. Our results demonstrate that the manufacturer's expected profit is quasi‐convex in the reliability (i.e., U‐shaped), and the retailer's expected profit is a piecewise (weakly) increasing function of the reliability. Specifically, there exists a threshold for the retailer's information reliability. Above the threshold, both manufacturer and retailer benefit from the improvement in the information reliability. This means that the manufacturer actually can profit from the exaggerated level of information asymmetry. Below the threshold, the improvement is still favorable to the retailer, but detrimental to the manufacturer due to increased information rents, and thus the manufacturer has no incentive to help the retailer to improve his forecast capability. At the threshold, the retailer's profit experiences a cliff‐like drop, while the manufacturer's profit achieves its minimum value. The result is applicable to both wholesale price contract and menu of contracts.

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