Skip to main content
Log in

Sharing Demand Information in a Value Chain: Implications for Pricing and Profitability

  • Published:
Review of Quantitative Finance and Accounting Aims and scope Submit manuscript

Abstract

While it is known that information exchange (IE) in a value chain improves resource coordination, scant attention has been paid to two issues. The first issue is the effect of relative bargaining strengths of the parties on whether and how IE will be implemented. The second issue is whether a resource-based costing system is adequate to motivate the implementation of information exchange. In this paper, we model a value chain consisting of a manufacturer and a retailer, where the retailer gets (private) demand information that has the potential of improving the manufacturer’s resource decisions. In this model, it is always beneficial for the value chain to implement IE. We show that in a monopsony or in a bilateral monopoly when the retailer has sufficient bargaining power, IE can be implemented if and only if the wholesale price compensates him for the loss of the information rent that he would get without IE. Using this model as the benchmark, we also examine other settings where the retailers have less bargaining power due to competition or size. In such settings, even though the retailers are better informed, the manufacturer can implement the IE regime costlessly and appropriate the information rent partially or fully. In effect, the manufacturer benefits both by improved resource coordination and by reduced payment for information rent. In all these settings, we find the retailer will not be motivated to adopt IE solely by a resource-based costing and pricing system.

This is a preview of subscription content, log in via an institution to check access.

Access this article

Price excludes VAT (USA)
Tax calculation will be finalised during checkout.

Instant access to the full article PDF.

Institutional subscriptions

Similar content being viewed by others

References

  • Aghion, P. and J. Tirole, “Formal and Real Authority in Organizations.” Journal of Political Economy 105, 1–29 (1997).

    Google Scholar 

  • Antle, R. and G. Eppen, “Capital Rationing and Organizational Slack in Capital Budgeting.” Management Science 32(2), 163–174 (1985).

    Google Scholar 

  • Baiman, S. and K. Sivaramakrishnan, “The Value of Private Pre-Decision Information in a Principal-Agent Context.” The Accounting Review 66(4), 747–766 (1991).

    Google Scholar 

  • Baiman, S. and M. V. Rajan, “Incentive Issues in Inter-Firm Relationships.” Accounting, Organizations and Society 27, 213–238 (2002).

    Google Scholar 

  • Baiman, S., P. E. Fischer and M. V. Rajan, “Performance Measurement and Design in Supply Chains.” Management Science 47(January), 173–188 (2001).

    Google Scholar 

  • Baiman, S., P. E. Fischer and M. V. Rajan, “Information, Contracting and Quality Costs.” Management Science 46(June), 776–789 (2000).

    Google Scholar 

  • Baiman, S. and M. V. Rajan, “Centraliation, Delegation and Shared Responsibility in the Assignment of Capital Investment Decision Rights.” Journal of Accounting Research 33, 135–164 (1995).

    Google Scholar 

  • Balakrishnan, R., T. J. Linsmeier and M. Venkatachalam, “Financial Benefits from JIT Adoption: Effects of Customer Concentration and Cost Structure.” The Accounting Review 71(2), 161–182 (1996).

    Google Scholar 

  • Cooper, R. and R. S. Kaplan, “Measure Costs Right: Make the Right Decisions.” Harvard Business Review Sept.–Oct. 96–103 (1998).

  • Cooper, T. and R. Slagmulder, “Cost Management for Internal Markets.” Management Accounting 79(11), 16–18 (1998).

    Google Scholar 

  • Christensen, J., “Communication in Agencies.” Bell Journal of Economics 12(Autumn), 661–676 (1981).

    Google Scholar 

  • Chu, W. and P. Desai, “Channel Coordination Mechanisms for Customer Satisfaction.” Marketing Science 14(4), 343–359 (1995).

    Google Scholar 

  • Cremer, J. and R. P. McLean, “Full Extraction of the Surplus in Bayesian and Dominant Strategy Auctions.” Econometrica 56, 1247–1257 (1998).

    Google Scholar 

  • Demski, J. S. and D. Sappington, “Optimal Incentive Contracts with Multiple Agents.” Journal of Economic Theory 21, 152–171 (1984).

    Google Scholar 

  • Desai, P. S. and K. Srinivasan, “Demand Signalling Under Unobservable Effort in Franchising: Linear and Non-Linear Price Contracts.” Management Science 41(10), 1608–1623 (1996).

    Google Scholar 

  • Feltham, G. and J. Xie, “Performance Measures Congruity and Diversity in Multi-Task Principal/Agent Relations.” The Accounting Review 69(3), 429–453 (1994).

    Google Scholar 

  • Gal-Or, E., “Duopolistic Vertical Restraints.” European Economic Review 35(6), 1237–1254 (1991).

    Google Scholar 

  • Lal, R. and C. Narasimhan, “The Inverse Relationship Between Manufacturer and Retailer Margins: Theory.” Marketing Science 15(2), 132–151 (1998).

    Google Scholar 

  • Lee, H. L. and S. Whang, “Information Sharing in a Supply Chain.” Working paper, Stanford University, Palo Alto, CA, 1998.

  • McAfee, R. P. and P. J. Reny, “Correlated Information and Mechanism Design.” Econometrica 60, 395–421 (1992).

    Google Scholar 

  • Moorthy, K. S., “Managing Channel Profit: Comment.” Marketing Science 6(4), 375 (1987).

    Google Scholar 

  • Myerson, R., “Incentive Compatibility and the Bargaining Problem.” Econometrica 48, 61–73 (1979).

    Google Scholar 

  • Narayanan, V. G. and A. Raman, “Contracting for Inventory in a Distribution Channel with Stochastic Demand and Substitute Products.” Working Paper Harvard Business School, 1996.

  • Penno, M., “Asymmetry of Pre-Decision Information and Managerial Accounting.” Journal of Accounting Research 22, 177–191 (1984).

    Google Scholar 

  • Shank, J. K. and V. Govindarajan, Strategic Cost Management: The New Tool for Competitive Advantage. Free Press: New York, 1993.

    Google Scholar 

  • Spulber, D. F., “Market Microstructure and Intermediation.” Journal of Economic Perspectives 10(3), 135–152 (1996).

    Google Scholar 

  • Srinivasan, K., S. Kekre and T. Mukhopadhyay, “Impact of Electronic Data Interchange Technology on JIT Shipments.” Management Science 40(10), 1291–1304 (1994).

    Google Scholar 

Download references

Author information

Authors and Affiliations

Authors

Corresponding author

Correspondence to Suresh Radhakrishnan.

Rights and permissions

Reprints and permissions

About this article

Cite this article

Radhakrishnan, S., Srinidhi, B. Sharing Demand Information in a Value Chain: Implications for Pricing and Profitability. Rev Quant Finan Acc 24, 23–45 (2005). https://doi.org/10.1007/s11156-005-5325-6

Download citation

  • Issue Date:

  • DOI: https://doi.org/10.1007/s11156-005-5325-6

Key words

Navigation