When should a manufacturer share truthful manufacturing cost information with a dominant retailer?

Abstract

Consider a dominated manufacturer ("Manu") supplying a dominant retailer ("Reta"). Manu knows the product's unit manufacturing cost (m) deterministically, whereas Reta knows it only in the form of an a priori subjective distribution over(m, ̃). Reta may implement any one of four contract formats: price-only; franchise fee; two-part tariffs; and menu of contracts ([MC]). This paper presents two groups of results. The first-group consists of procedures for Reta to compute optimal parameters for each of these contract formats. These first-group results are then used to study: (i) the conditions under which Manu is interested in sharing his m-information and thus improving Reta's over(m, ̃)-perception; and (ii) how such information sharing conditions are affected by the contract formats. We find that: (i) Manu benefits from reducing Reta's uncertainty on her over(m, ̃)-perception only when the product's profitability is quite small; (ii) over a wide range of plausible conditions Manu benefits from a poorer quality of Reta's a prioriover(m, ̃) -perception, regardless of what contract format Reta uses; (iii) the range of conditions under which Manu benefits from a poorer quality of Reta's m-perception is not altered or narrowed by Reta's use of a more sophisticated contract format (such as [MC]), even though such "channel coordinating" contracts increase channel efficiency and Reta's profit. In short, current methods cannot motivate Manu to share m-information honestly, hence Reta should not trust the m-information provided by Manu. These results reveal an overlooked aspect amidst the popular "bigger pie" notion of supply chain cooperation and emphasize the need to develop arrangements that can truly motivate honest information sharing. © 2008 Elsevier B.V. All rights reserved.