Channel incentives in sharing new product demand information and robust contracts
Demand for a new product is often highly uncertain. As the developer of a new product, the manufacturer may reduce the uncertainty of the products demand through observing progress in his product development process or receiving demand signals directly from customers. This paper first shows that a centralized channel always benefits from improved demand information. Yet, to realize this benefit in a decentralized manufacturerretailer channel, the manufacturer needs to disclose his private demand information to the retailer. We show that the manufacturers incentive to share his improved demand information depends on the supply contract signed with the retailer. Furthermore, mandating the manufacturer to disclose his improved demand information can actually reduce the total channel profit. We provide managerial insights by analyzing three widely used contract forms. We investigate whether these contracts are robust under an unanticipated demand information update observed by the manufacturer. We show that the quantity flexibility contract with a high return rate is not robust. The buyback contract, however, is robust and always achieves information sharing while preserving channel performance.
information sharing supply chain management information asymmetry convex ordering