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Optimal Pricing with Vertical Information Exchange under Upstream Competition

Tian Li and Lin Chen
School of Business, East China University of Science and Technology, Shanghai 200237, China
Abstract—This paper studies firms’ pricing strategies in a supply chain in which two manufacturers sell substitutable products to a common retailer. Each firm has access to a signal about the uncertain demand. The manufacturers make the wholesale price decisions, and subsequently the retailer makes the retail price decision. If a manufacturer and the retailer exchange their demand signals with each other, their channel is communicative, and is non-communicative otherwise. As the retailer may infer a manufacturer’s demand signal through his wholesale price even if their channel is non-communicative, the vertical information exchange can alter firms pricing strategies. We consider three informational scenarios, both channels communicative, exactly one channel communicative, and both channels non-communicative. We fully characterize the optimal prices in each scenario and then compare them. The more number of communicative channels, the higher the expected wholesale price. We show that vertical information exchange is always beneficial to the manufacturer but may be harmful to the retailer.

Index Terms—information sharing, Supply chain, Upstream competition, Bilateral information exchange

Cite: Tian Li and Lin Chen, "Optimal Pricing with Vertical Information Exchange under Upstream Competition" Journal of Advanced Management Science, Vol. 6, No. 2, pp. 81-85, June 2018. doi: 10.18178/joams.6.2.81-85
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