Decentralized Inventory Sharing with Asymmetric Information

We study the information asymmetry issues in a decentralized inventory sharing system consisting of a manufacturer and two independent retailers, who privately hold demand information, non-cooperatively place their orders, but cooperatively share inventories with each other. We find that while the manufacturer needs retailers’ mean demand and standard deviation for her wholesale price decision, each retailer only needs to know the other retailer’s demand standard deviation for his order quantity decision. However, an incentive compatibility analysis shows that retailers have incentives to share their demand information untruthfully. Although a truth-inducing scheme can be developed for a system with symmetric retailers who share information between themselves, no such scheme can be developed to ensure truth-telling to the manufacturer. Further, we develop a coordination mechanism (CIS) for the decentralized inventory sharing system, considering information asymmetry. We show that CIS coordinates the manufacturer-retailers system and leads to an all-win situation under complete information. More importantly, CIS minimizes the value of information such that each party can obtain expected profits very close to their first-best profits even under asymmetric information, hence indirectly solves the information asymmetry problem. To our knowledge, this work is the first to study decentralized inventory sharing and its coordination considering asymmetric information.