On the interaction between asymmetric demand signal and forecast accuracy information

Abstract Demand information is critical information for manufacturers when contracting, whereas very often, both the demand signal and its accuracy are privately known by the retailer. To better understand the impact of these two types of asymmetric information and further the information structure preferences of both the retailer and the manufacturer, this paper first establishes a multi-dimensional screening model, and then discusses the contracting problem under several simpler but commonly investigated information structures. It demonstrates that for all the cases, the optimal contract has a threshold structure: the manufacturer offers a pooling contract when the unit production cost is lower or higher than a certain level, but offers a separating one when the unit production cost is intermediate. Further, it shows that the private demand signal and forecast accuracy information complement each other under certain circumstances, whereas under other circumstances, one dimensional asymmetric information might not have an impact on the other and even be detrimental to the retailer, which is quite interesting. Meanwhile, given that the forecast accuracy is asymmetric information, it reveals that retailer possessing more dimensional private information might benefit the manufacturer; however, if the demand signal is asymmetric information, obtaining more information on the forecast accuracy becomes important. Finally, the value of one particular type of information under one dimensional asymmetric information is not necessarily the same as that under two dimensional asymmetric information due to the interaction effect.