The Impact of Capacity Information on Supplier Encroachment

In today's complex business environment, conflicting relationships among firms are becoming the norm. Firms can be supply chain partners, but at the same time, they can be competitors. Moreover, capacity is often limited. Prior research has examined this problem in a perfect information setting, but in reality, a supplier often has private information in its own capacity. We consider a signaling game in which the supplier has private information in its own capacity. The supplier first sets the wholesale price. The buyer then decides on the order quantity, and the supplier decides whether or not to encroach on the end-customer market. We find that the supplier can be worse off while the buyer can be better off from the supplier's private information on capacity.