Strategic demand information sharing under partial cross ownership

Abstract

We consider a two-echelon supply chain with partial cross ownership (PCO) comprising a supplier and a retailer. The retailer is endowed with superior information about uncertain market potential. The supplier must produce the product before the market potential is realized. We explore the retailer’s strategy to share his private demand information with the supplier via cheap talk. We demonstrate that when the proportion of partial cross holding shares is moderate, the retailer can disclose private demand information truthfully. Without PCO, this informative equilibrium cannot be achieved regardless of the acquired signal. With PCO, the retailer wants to obtain a sufficient production quantity if the realized demand is high and fears the cost of unsold products if the realized demand is low. These two countervailing incentives can cause the retailer to share his information truthfully. We find that this truthful information sharing benefits both the retailer and the supplier. In addition, we discuss the case of endogenous wholesale price and indicate the conditions in which truthful information sharing can be achieved. Moreover, we find that when the market potential follows a general continuous distribution, the perfect informative equilibrium does not exist.