Signaling Information in a Vertical Decentralized Supply Chain

We consider a decentralized supply chain with one manufacturer and one retailer who are engaged in a sequential-move game. The manufacturer and the retailer decide the wholesale price and retail margin to maximize their respective profits. The manufacturer possesses some private information about future demand, and hence enjoys advantage from both Stackelberg leadership and information over the retailer. Though the retailer cannot observe the manufacturer’s private information, he can inferred it from leader’s wholesale price. However, to induce the retailer to reduce retail margin, the manufacturer has to lower down the wholesale price to signal a low demand which benefits the retailer. The general research question is whether the manufacturer’s profit is still higher than the retailer’s profit, as in the sequential-move game without private demand information. We find that information leakage cost may outweigh the benefit from Stackelberg leadership, and characterize conditions under which the retailer’s profit is higher than that of the manufacturer.