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Does a Manufacturer Benefit from Selling to a Better-Forecasting Retailer?

  • Terry A. Taylor

    ()

    (Haas School of Business, University of California, Berkeley, Berkeley, California 94720)

  • Wenqiang Xiao

    ()

    (Stern School of Business, New York University, New York, New York 10012)

Registered author(s):

    This paper considers a manufacturer selling to a newsvendor retailer that possesses superior demand-forecast information. We show that the manufacturer's expected profit is convex in the retailer's forecasting accuracy: The manufacturer benefits from selling to a better-forecasting retailer if and only if the retailer is already a good forecaster. If the retailer has poor forecasting capabilities, then the manufacturer is hurt as the retailer's forecasting capability improves. More generally, the manufacturer tends to be hurt (benefit) by improved retailer forecasting capabilities if the product economics are lucrative (poor). Finally, the optimal procurement contract is a quantity discount contract.

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    File URL: http://dx.doi.org/10.1287/mnsc.1100.1204
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    Article provided by INFORMS in its journal Management Science.

    Volume (Year): 56 (2010)
    Issue (Month): 9 (September)
    Pages: 1584-1598

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    Handle: RePEc:inm:ormnsc:v:56:y:2010:i:9:p:1584-1598
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    1. Lewis, Tracy R. & Sappington, David E. M., 1991. "All-or-nothing information control," Economics Letters, Elsevier, vol. 37(2), pages 111-113, October.
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    5. Fu, Qi & Zhu, Kaijie, 2010. "Endogenous information acquisition in supply chain management," European Journal of Operational Research, Elsevier, vol. 201(2), pages 454-462, March.
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    7. Özalp Özer & Wei Wei, 2006. "Strategic Commitments for an Optimal Capacity Decision Under Asymmetric Forecast Information," Management Science, INFORMS, vol. 52(8), pages 1238-1257, August.
    8. Brian Tomlin, 2003. "Capacity Investments in Supply Chains: Sharing the Gain Rather Than Sharing the Pain," Manufacturing & Service Operations Management, INFORMS, vol. 5(4), pages 317-333, November.
    9. Z. Kevin Weng, 1995. "Channel Coordination and Quantity Discounts," Management Science, INFORMS, vol. 41(9), pages 1509-1522, September.
    10. Fangruo Chen & Awi Federgruen & Yu-Sheng Zheng, 2001. "Coordination Mechanisms for a Distribution System with One Supplier and Multiple Retailers," Management Science, INFORMS, vol. 47(5), pages 693-708, May.
    11. Ganesh Iyer & Chakravarthi Narasimhan & Rakesh Niraj, 2007. "Information and Inventory in Distribution Channels," Management Science, INFORMS, vol. 53(10), pages 1551-1561, October.
    12. Hau L. Lee & Kut C. So & Christopher S. Tang, 2000. "The Value of Information Sharing in a Two-Level Supply Chain," Management Science, INFORMS, vol. 46(5), pages 626-643, May.
    13. Yossi Aviv, 2001. "The Effect of Collaborative Forecasting on Supply Chain Performance," Management Science, INFORMS, vol. 47(10), pages 1326-1343, October.
    14. Terry A. Taylor & Wenqiang Xiao, 2009. "Incentives for Retailer Forecasting: Rebates vs. Returns," Management Science, INFORMS, vol. 55(10), pages 1654-1669, October.
    15. Julia Miyaoka & Warren H. Hausman, 2008. "How Improved Forecasts Can Degrade Decentralized Supply Chains," Manufacturing & Service Operations Management, INFORMS, vol. 10(3), pages 547-562, July.
    16. Robert L. Winkler, 1981. "Combining Probability Distributions from Dependent Information Sources," Management Science, INFORMS, vol. 27(4), pages 479-488, April.
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