Information Sharing in a Long-Term Supply Chain Relationship: The Role of Customer Review Strategy

In this paper, we study the practice of forecast sharing and supply chain coordination with a game-theoretical model. We find that in a one-shot version of the game, forecasts are not shared truthfully by the customer. The supplier will rationally discount the forecast information in her capacity allocation. This results in Pareto sub-optimality for both supply chain parties. However, we show that a more efficient, truth-sharing outcome can emerge as an equilibrium from a long term relationship. In this equilibrium, forecast information is transmitted truthfully, and trusted by the supplier who in turn allocates the system-optimal equilibrium. This leaves both customer and supplier better off, compared to the non-truthful-sharing equilibrium. We identify a multi-period review strategy profile that supports the truthful-sharing equilibrium. The key element of this strategy is that the supplier computes a scoring index of the customer’s behavior that is updated over time and used to evaluate if the customer has sufficient incentive to share his private information truthfully in each transaction of the repeated game. Compared to trigger strategies, review strategies are more tolerant, but require diligence and more monitoring effort. ∗Operations and Technology Management Department, Boston University School of Management. †Operations and Information Management Department, The Wharton School, Univ. of Pennsylvania. ‡Marketing Group, Haas School of Business, University of California-Berkeley.