Strategic information management in a distribution channel

Abstract Two-way asymmetric information frequently hampers performances of manufacturer-retailer distribution channel members. Typically, the manufacturer is better informed about the quality of his product than the retailer while the latter knows more about her consumers’ preference for product quality than the manufacturer. Bridging these information gaps can enable more profitable channel (wholesale and retail) pricing decisions. Specifically, once the manufacturer knows his product quality, he can at some cost advertise it to the downstream retailer and her consumers. Similarly, the retailer can decide to conduct market research at some cost to more precisely determine her consumers’ preference for product quality and share her finding with the manufacturer. In this paper, the authors examine the strategic impacts of two alternative timings of these information gap-filling decisions: In the “Upfront Market Research” (UMR) scenario, the retailer moves first with her market research decision and then the manufacturer makes his product quality advertising decision. Alternatively, in the “Upfront Quality Advertising” (UQA) scenario, the manufacturer first decides about product quality advertising and then the retailer proceeds with her market research decision. This paper analytically investigates and compares the strategic impacts of the UMR and UQA scenarios on the firms’ equilibrium information strategies and payoffs in a two-way asymmetric information setting for the first time. The authors find that the retailer is always better off in the UQA than the UMR scenario while the manufacturer can find either UMR or UQA decision sequence more beneficial depending on the relative costs of market research and product quality advertising. The analyses offer new insights and guidelines for more efficient and profitable information acquisition and coordination in bilateral manufacturer-retailer channels.