Information Leakage in Supply Chains

Abstract

Information sharing within a supply chain has numerous benefits. However, in the past decade, several works using game-theoretic models have pointed out that: (1) a supply chain entity may not have an incentive to share information for fear of exploitation by the party (e.g., manufacturer) with whom they share information as well as leakage of information to their competitors, (2) the negative effects of information leakage can be mitigated by using appropriate contracts between supply chain entities. This chapter reviews this literature and provides a framework for classifying it. The most common supply chain structure analyzed in these works comprises of a manufacturer supplying a set of retailers who share demand information with the manufacturer which may be leaked, either directly or indirectly, to other retailers. The literature has shown that while vertical information sharing with the manufacturer always has negative effects, the horizontal leakage of information to other retailers can have positive or negative effects and the strength of these effects depends on a number of factors. These include whether the competition among retailers is on price or quantity, whether their products are substitutes or complements, whether information sharing arrangements are made before or after private information is revealed and the level of accuracy of private information among different entities. To incentivize truthful information sharing despite the potential for leakage and its negative effects, the literature has come up with a variety of solutions: side payments by manufacturers to retailers, different wholesale prices charged to different retailers, revenue sharing contracts and market-based contracts, etc. In addition, retailers can enter into a binding confidentiality agreement to prevent leakage. Some of these solutions can coordinate the supply chain and sometimes benefit all the entities, including ones that do not have private information. While anecdotal evidence from industry suggests that firms primarily fear direct leakage of information to their competitors, two important insights from the academic literature are: (1) indirect leakage of information can have as significant an effect on the incentives to share information as direct leakage, (2) information leakage to competitors can sometimes have positive effects.