Information acquisition and transparency in a supply chain with asymmetric production cost information

This paper studies a retailer outsourcing the production to a supplier who can improve the quality of the production cost information by exerting costly forecasting effort. The outcome of the supplier's information acquisition may turn out to be either successful, with the supplier becoming informed, or unsuccessful, with the supplier remaining uninformed. Once the outcome of the forecasting is resolved, the supplier knows the information status (informed or uninformed) and content (high type or low type). We consider two-layer information asymmetry and analyze three different scenarios: no forecasting, forecasting with transparent information acquisition (disclosing information status) and forecasting with nontransparent information acquisition (hiding information status). We study both the retailer's contract design and the supplier's information disclosure decision. We obtain some interesting observations. First, the retailer's incentive for the supplier's forecasting is a threshold policy: If the forecasting cost is low, then the retailer will prefer the supplier to forecast, otherwise, the retailer will prefer the supplier not to forecast. Second, when the forecasting cost is high and the production cost variance is small, under transparent information acquisition, the high cost supplier's production quantity may be either upward or downward distorted; while under nontransparent information acquisition, the uninformed supplier's production quantity is either upward or downward distorted, and the high cost supplier's production quantity is always downward distorted. At last, the supplier can benefit from transparency only under some specific conditions, and when the production cost variance is extremely large, nontransparent information acquisition is always the supplier's first choice.