Does a Manufacturer Benefit from Selling to a Better-Forecasting Retailer in a Supply Chain with Responsive Pricing?

Given that firms may have to make stocking decisions before learning real demand due to long production lead times but can adjust retail prices rapidly in response to realized demand, this paper considers a supply chain with responsive pricing, in which a manufacturer sells a product to a newsvendor-type retailer and the latter possesses imperfect forecasting capability about market demand (i.e., can observe an imperfect private demand signal). We analyze the effects of demand uncertainty and forecasting capability on pricing and stocking decisions, and further examine whether the manufacturer benefits from a retailer with strong forecasting capability. We show that, when demand uncertainty is high, the manufacturer chooses a retailer with worst or best forecasting capability, and the retailer makes a stocking decision such that there will exist leftovers with the realized demand being low (i.e., overstocking) or orders nothing. Differently, under moderate demand uncertainty, the manufacturer chooses a retailer with intermediate forecasting capability and the high-demand-signal retailer makes an overstocking decision, while the low-demand-signal retailer always sells all stocked products (i.e., understocking). When demand uncertainty is low, the manufacturer does not care about the retailer’s forecasting capability. We also find that, the improvement in forecasting capability does not always benefit the retailer when the demand uncertainty is moderate. Finally, we discuss the impacts of production cost and demand signal acquisition cost on the manufacturer’s preference.