| This paper studies a recent development in the retailer-producer relationship. Several giant retailers have established "deep data sharing (DDS)" systems with their suppliers, in which a retailer voluntarily gives away its private revenue information to its suppliers.; I model two information arrangements in a retailer-producer team. In the "arm's-length" setting, the production parameter is the producer's private information and the revenue parameter is the retailer's private information. In the DDS setting, the producer can observe both the production and revenue parameters. The optimal mechanism consists of a transfer payment function and a production assignment function and maximizes the weighted sum of the two firms' profits.; I identify conditions under which information sharing benefits the retailer. DDS is beneficial to the retailer when (1) the retailer has dominant bargaining power, (2) there is significant uncertainty regarding the production and marketing conditions, and (3) there is a large fixed cost to establish a cooperative relationship between the two firms. On the other hand, the producer is generally better off in a DDS system. These results are consistent with the empirical findings of Heide and John (1990).; The timing of each firm's commitment decision is a crucial factor in determining whether or not an appropriate mechanism exists. This analysis shows that if information sharing makes the firms change from using the interim to ex ante participation constraints, the first best production schedule can be implemented. This would increase the total expected profit. But the party with less bargaining power is strictly worse off than in the arm's-length setting. |
