Vertical Information Sharing in a Volatile Market

When demand is uncertain, manufacturers and retailers often have private information on future demand, and such information asymmetry impacts strategic interaction in distribution channels. In this paper, we investigate a channel consisting of a manufacturer and a downstream retailer facing a product market characterized by short product life, uncertain demand, and price rigidity. Assuming the firms have asymmetric information about the demand volatility, we examine the potential benefits of sharing information and contracts that facilitate such cooperation. We conclude that under a wholesale price regime, information sharing may not improve channel profits when the retailer underestimates the demand volatility but the manufacturer does not. Although information sharing is always beneficial under a two-part tariff regime, it is in general not sufficient to achieve information sharing and additional contractual arrangements are necessary. The contract types we consider to facilitate sharing are profit sharing and buy back contracts.