Conflict of Interest Regarding Information Transparency in a Business-to-Business Electronic Market with Two-Sided Competition

As a platform to facilitate information sharing, business-to-business (B2B) electronic markets allow buyers and sellers to conduct transactions in a digital environment with greater information transparency. Vertical information transparency about demand has been shown to be beneficial to supply chain management. Thus, information technology (EDI, B2B e-markets) is believed to offer great benefits. Yet, the literature generally assumes that either the downstream firm (retailer) or upstream firm (manufacturer) is a monopoly. Little is known whether this is still the case if both sides face competition. Built on the existing literature, this paper develops a simple two-level e-market model with upstream and downstream competition to study the effects of information transparency. We find that information transparency enabled by electronic markets can create value for the whole supply chain, yet it affects retailers and manufacturers very differently: one side will be hurt, depending on the competition mode (Cournot or Bertrand) in the downstream industry. Unfortunately, it never unanimously benefits the two sides; conflict of interest persists. Then, the theoretical benefits of information transparency recognized in the literature will not materialize. It illustrates a fundamental challenge with electronic markets and offers a possible explanation to the difficulty faced by many B2B e-markets. To deal with this issue, we propose a discriminatory pricing scheme for the e-market operator to internalize informational benefits among retailers and manufacturers so that the online market mechanism can be sustainable.