Information sharing and information rents in a two-level supply chain

Advances in information technology have greatly facilitated information exchange in value- chains, and the resulting efficiencies from resource coordination have led to higher profits. However, in spite of the well-established advantages, not all value-chains have implemented such information exchanges. In this paper, we show that this lack of implementation could arise due to strategic behavior of value-chain partners. Specifically, allowing for strategic behavior, we examine the conditions under which information exchanges might or might not be implemented. The value-chain partners' trade off their share of increased value-chain profits from information exchange against the loss of their information rent. We develop the model of a two-partner value- chain with a manufacturer and a privately informed retailer. We show that the value-chain partners will agree to move from the traditional (no information exchange) to the information exchange regime only if (a) the retailer is sufficiently large, (b) the demand variability is sufficiently high, and (c) the cost of manufacturing is sufficiently low. This provides a rationale for why information exchange is not prevalent with small retailers.