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Trust in Forecast Information Sharing

Author

Listed:
  • Özalp Özer

    () (School of Management, The University of Texas at Dallas, Richardson, Texas 75080)

  • Yanchong Zheng

    () (Management Science and Engineering, Stanford University, Stanford, California 94305)

  • Kay-Yut Chen

    () (Hewlett-Packard Laboratories, Palo Alto, California 94304)

Abstract

This paper investigates the capacity investment decision of a supplier who solicits private forecast information from a manufacturer. To ensure abundant supply, the manufacturer has an incentive to inflate her forecast in a costless, nonbinding, and nonverifiable type of communication known as "cheap talk." According to standard game theory, parties do not cooperate and the only equilibrium is uninformative--the manufacturer's report is independent of her forecast and the supplier does not use the report to determine capacity. However, we observe in controlled laboratory experiments that parties cooperate even in the absence of reputation-building mechanisms and complex contracts. We argue that the underlying reason for cooperation is trust and trustworthiness. The extant literature on forecast sharing and supply chain coordination implicitly assumes that supply chain members either absolutely trust each other and cooperate when sharing forecast information, or do not trust each other at all. Contrary to this all-or-nothing view, we determine that a continuum exists between these two extremes. In addition, we determine (i) when trust is important in forecast information sharing, (ii) how trust is affected by changes in the supply chain environment, and (iii) how trust affects related operational decisions. To explain and better understand the observed behavioral regularities, we also develop an analytical model of trust to incorporate both pecuniary and nonpecuniary incentives in the game-theoretic analysis of cheap-talk forecast communication. The model identifies and quantifies how trust and trustworthiness induce effective cheap-talk forecast sharing under the wholesale price contract. We also determine the impact of repeated interactions and information feedback on trust and cooperation in forecast sharing. We conclude with a discussion on the implications of our results for developing effective forecast management policies. This paper was accepted by Ananth Iyer, operations and supply chain management.

Suggested Citation

  • Özalp Özer & Yanchong Zheng & Kay-Yut Chen, 2011. "Trust in Forecast Information Sharing," Management Science, INFORMS, vol. 57(6), pages 1111-1137, June.
  • Handle: RePEc:inm:ormnsc:v:57:y:2011:i:6:p:1111-1137
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    File URL: http://dx.doi.org/10.1287/mnsc.1110.1334
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    References listed on IDEAS

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    7. Olivier Bonroy & Alexis Garapin & Daniel Llerena, 2017. "Changing partners in a cheap talk game: Experimental evidence," International Journal of Economic Theory, The International Society for Economic Theory, vol. 13(2), pages 197-216, June.
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    10. Sang-Hyun Kim & Serguei Netessine, 2013. "Collaborative Cost Reduction and Component Procurement Under Information Asymmetry," Management Science, INFORMS, vol. 59(1), pages 189-206, November.
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    12. Harwood, Ian A. & Turnock, Stephen R. & Ashleigh, Melanie J., 2014. "When bubbles burst: Mimetic insights into minimising confidentiality breaches," European Management Journal, Elsevier, vol. 32(1), pages 84-90.
    13. Baruah, Pundarikaksha & Chinnam, Ratna Babu & Korostelev, Alexander & Dalkiran, Evrim, 2016. "Optimal soft-order revisions under demand and supply uncertainty and upstream information," International Journal of Production Economics, Elsevier, vol. 182(C), pages 14-25.
    14. repec:eee:intfor:v:33:y:2017:i:4:p:864-877 is not listed on IDEAS
    15. Gao, Long, 2015. "Collaborative forecasting, inventory hedging and contract coordination in dynamic supply risk management," European Journal of Operational Research, Elsevier, vol. 245(1), pages 133-145.
    16. Li, Tian & Zhang, Hongtao, 2015. "Information sharing in a supply chain with a make-to-stock manufacturer," Omega, Elsevier, vol. 50(C), pages 115-125.
    17. Basak Kalkanci & Kay-Yut Chen & Feryal Erhun, 2011. "Contract Complexity and Performance Under Asymmetric Demand Information: An Experimental Evaluation," Management Science, INFORMS, vol. 57(4), pages 689-704, April.
    18. Arcan Nalca, & Tamer Boyaci, & Saibal Ray, 2017. "Consumer taste uncertainty in the context of store brand and national brand competition," ESMT Research Working Papers ESMT-17-01, ESMT European School of Management and Technology.
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    20. Susan A. Kayser & John W. Maxwell & Michael W. Toffel, 2014. "Supply chain screening without certification: The critical role of stakeholder pressure," Working Papers 2014-08, Indiana University, Kelley School of Business, Department of Business Economics and Public Policy.
    21. Bicer, Isik & Hagspiel, Verena, 2016. "Valuing quantity flexibility under supply chain disintermediation risk," International Journal of Production Economics, Elsevier, vol. 180(C), pages 1-15.
    22. Daniel C. Feiler & Jordan D. Tong & Richard P. Larrick, 2013. "Biased Judgment in Censored Environments," Management Science, INFORMS, vol. 59(3), pages 573-591, January.
    23. Guangwen Kong & Sampath Rajagopalan & Hao Zhang, 2013. "Revenue Sharing and Information Leakage in a Supply Chain," Management Science, INFORMS, vol. 59(3), pages 556-572, November.
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