The Value of Information Design in Supply Chain Management

This paper studies an information design problem of a retailer in a two-tier supply chain that procures a single type of product from a supplier. The supplier needs to decide on a production quantity by balancing the shortage cost and the excess inventory holding cost with respect to the retailer’s demand. The retailer’s demand is random, but the retailer receives an informative signal about the demand before the supplier sets the production quantity and places orders after learning the demand realization. The retailer wants to reduce the shortage cost, and to this end, the retailer can disclose information about the retailer’s signal to persuade the supplier to increase production levels. For this setup, we characterize the optimal information disclosure policy of the retailer and shed light on settings in which the retailer strictly benefits from carefully designed information disclosure policies relative to a full- or a no-disclosure policy. This paper was accepted by Jeannette Song, operations management. Funding: O. Candogan acknowledges the NSF (National Science Foundation) [Grant 2216912] for “Institute for Data, Econometrics, Algorithms and Learning.” Supplemental Material: The online appendix and data files are available at https://doi.org/10.1287/mnsc.2023.03004 .