Information disclosure with endogenous channel structure

Abstract This article investigates the firms' optimal quality information disclosure strategies in a supply chain, wherein the supplier may encroach into the retail channel to sell products directly to end consumers. We consider two disclosure formats, namely, retailer disclosure (R‐C) and supplier disclosure (S‐C), and examine the optimal disclosure format from each firm's perspective. We show that either firm prefers to delegate the disclosure option to its partner when the supplier cannot encroach. However, the threat of supplier encroachment dramatically alters the firm's preference of disclosure. The supplier may prefer the S‐C format to the R‐C format when the entry cost is low and the disclosure cost is high to achieve a higher quality information transparency. Meanwhile, the retailer may prefer the R‐C format to the S‐C format when the entry cost is intermediate to deter the possible encroachment of the supplier. In this sense, the firms' preferences of disclosure format can be aligned due to the threat of supplier encroachment. The consumer surplus is always higher under the S‐C format while either disclosure format can lead to a higher social welfare. We also consider an alternative scenario under which the supplier encroaches after the product quality information is disclosed. An interesting observation appears that the supplier may encroach when the product quality is low but foregoes encroachment when the product quality gets higher.