Eliminate demand information disadvantage in a supplier encroachment supply chain with information acquisition

The retailer, who is closer to customers, usually has more information on demand than its manufacturer does. This paper focuses on a manufacturer's information acquisition strategy in a supply chain, and the design of the first-best contract to achieve a win-win for the manufacturer and its retailer. We consider a manufacturer encroachment supply chain in which the manufacturer sells products both directly to the consumer and indirectly through a retailer. The retailer has private demand information while the manufacturer has the option of acquiring demand information. The manufacturer sets the retail price in its direct channel, and the retailer sets the retail price in the retail channel. We consider the two retail price leadership cases, either the manufacturer decides the retail price first or the retailer decides the retail price first. We find that the manufacturer can be hurt by acquiring information, even when the cost is negligible, because competition between the two channels is intensified. Moreover, while one might expect that the retailer is better off from having more information, we show that the retailer can in fact benefit when the manufacturer acquires information. Lastly, we find that the retailer may be worse off from being the retail price leader when the manufacturer acquires demand information, and price competition can be intensified if more customers prefer the direct channel (indirect channel) when the manufacturer (the retailer) acts as the price leader.