Retailer Information Sharing with Supplier Encroachment

This study investigates a retailer's incentive for sharing private demand information with a supplier who may encroach the retail channel by imposing a fixed entry cost. Although conventional wisdom suggests that a retailer should withhold her private demand observations to maintain an information advantage over the supplier, we obtain a different conclusion by demonstrating that the retailer may prefer to voluntarily share the demand information in anticipation of supplier encroachment. The intuition is that in face of the threat of supplier encroachment, sharing low demand information may prevent the supplier from establishing a direct selling channel, which will reduce downstream channel competition. This strategic effect of information sharing is new and only becomes dominant when there is an intermediate entry cost for encroachment and a high channel substitution rate. In contrast, when there are deviations from these conditions, the supplier's equilibrium encroachment decision is consistent and irrespective of the retailer's decision to share information, which makes withholding the demand information more beneficial to the retailer. The change of information sharing structure in the channel also leads to some unintended payoff implications, as the supplier's and channel's payoffs exhibit non†monotonic relations to the entry cost or channel substitution rate.