Sales Information Transparency and Trust in Repeated Vertical Relationships

Problem definition: We study a repeated interaction between a manufacturer and a retailer, where the retailer may share with the manufacturer past sales information. In our model, such information cannot improve the latter’s predictive capabilities of future demand, but it does allow him to infer past demand. Academic/practical relevance : Our main research questions are under what conditions the retailer and the manufacturer benefit from sharing such past sales information and how dynamic interaction and past sales information affect the efficiency of the distribution channel. Methodology : We model a repeated relationship between a manufacturer and a retailer, where demand fluctuates in an independent and identically distributed manner between periods. In each period, the retailer privately observes the current demand, and the manufacturer offers a menu of contracts to elicit the retailer to reveal its private information. The manufacturer may observe sales information that reveals past demand at the end of each period if the retailer chooses to share such information. Results : We find that even without sharing sales information, repeated interaction by itself enhances efficiency and profits for both firms. Past sales information further improves the channels’ efficiency and increases the manufacturer’s expected profit. Yet, past sales information increases (decreases) the retailer’s per-period expected profit when the retailer places a low (high) value on its future profits. Managerial implications : Our results provide a new strategic reasoning for sharing past sales information—as a way to increase trust in repeated vertical relationships. Furthermore, when the retailer can share a noisy signal regarding past demand, this may facilitate the exchange of sales information. We also consider the case of a financially constrained retailer and demonstrate that financial constraints may benefit the retailer as they limit the market power of the manufacturer. In contrast, the manufacturer and the channel’s efficiency are always worse off when the retailer is financially constrained.