Information sharing and production mode selection with price and quality competition

Abstract In recent years, retailers can obtain consumers' demand information from rich market data, such as their browsing history and sales data. This gives retailers access to more demand information about consumers than manufacturers. Furthermore, many retailers have begun to share demand information with their upstream manufacturers who provide goods of a certain quality. Because an increasing number of consumers are concerned about product prices and product quality levels and are even willing to pay a higher price for high‐quality products, manufacturers consider two production modes to adapt to the market: the Q‐before‐IS mode or the Q‐after‐IS mode. To capture substantial consumer markets, retailers have also begun to provide their goods to compete with the manufacturers. Motivated by these practices, this study analyzes the retailer's information‐sharing strategy and the manufacturer's production mode selection under price and quality competition. We find that under the Q‐before‐IS mode, the retailer has no incentive to voluntarily share information with the manufacturer. However, under the Q‐after‐IS mode, the retailer would share two products' information with the manufacturer when the quality investment cost factor is relatively low. Our findings confirm that the retailer is induced to share information because the retailer and manufacturer participate in the quality and price competition after observing the demand. Moreover, the manufacturer prefers the Q‐after‐IS (Q‐before‐IS) mode under the equilibrium information‐sharing strategy when the demand fluctuation is large (otherwise). This indicates that the retailer's information‐sharing strategy plays a key role in the manufacturer's preferred production mode.