Vertical Information Sharing in Distribution Channels

This paper examines the information-sharing behavior of firms in a distribution channel context. While information sharing among firms can occur in a horizontal (among competitors) or vertical (channel members) context, previous attempts at modeling information sharing has primarily been restricted to the horizontal context. For marketers, channel alliances are interesting in view of their growing popularity as witnessed by initiatives like ECR and category management. Such initiatives usually involve the pooling of, often complimentary, information available with manufacturers and retailers. It is argued that such pooling of information should lead to better decision-making and hence it is desirable. However, in practice, category management is often implemented with a somewhat interesting institution of category captain, which appears to be a restricted form of information pooling. It involves the retailer entering into an alliance with only one (of many) supplier in a category, who is accorded the role of category captain. We first analyze the information sharing incentives of the two industry participants, manufacturer and retailer, in a bilateral monopoly. We find that whether sharing will occur or not is crucially dependent on the baseline quality of information available with the firms and on the degree of complementarity of resources that in turn determine how effective information pooling is. Next, using a model of competing symmetric duopolists selling through a common retailer, we show that information sharing between the alliance partners can sometimes give rise to the emergence of the so-called category captain, i.e., an exclusive alliance. The total channel profits and those of the partners in alliance go up. This increased profit is due to higher average wholesale prices, which can be interpreted as reduction in price promotions, a key goal of the category management initiative. The model generates predictions about when informationsharing alliances are more likely and can also be extended to answer managerially relevant question for retailers, i.e., who to choose as category captain?