We study the effect of downstream competition on incentives for demand forecast investments in supply chains. We show that with common pricing schemes, such as wholesale price or two-part tariffs, downstream firms under Cournot competition overinvest in demand forecasting. Analyzing the determinants of overinvestment, we demonstrate that under wholesale price contracts and two-part tariffs, total demand forecast investment can be very significant, and as a result, the supply chain can suffer substantial losses. We show that an increased number of competing retailers and uncertainty in consumer demand tend to increase inefficiency, whereas increased consumer market size and demand forecast costs reduce the loss in supply chain surplus. We identify the causes of inefficiency, and to coordinate the channel with forecast investments, we explore contracts in the general class of market-based contracts used in practice. When retailers' forecast investments are not observable, such a contract that employs an index-price can fully coordinate the supply chain. When forecast investments are observable to others, however, the retailers engage in an "arms race" for forecast investment, which can result in a significant increase in overinvestment and reduction in supply chain surplus. Furthermore, in that case, simple market-based contracts cannot coordinate the supply chain. To solve this problem, we propose a uniform-price divisiblegood auction-based contracting scheme, which can achieve full coordination when forecast investments are observable. We also demonstrate the desirable properties for implementability of our proposed coordinating contracting schemes, including incentive-compatible and reliable demand forecast information revelation by the retailers, and being regret-free.

W e consider a supply chain with an upstream supplier who invests in innovation and a downstream manufacturer who sells to consumers. We study the impact of supply chain contracts with endogenous upstream innovation, focusing on three different contract scenarios: (i) a wholesale price contract, (ii) a quality-dependent wholesale price contract, and (iii) a revenue-sharing contract. We confirm that the revenue-sharing contract can coordinate supply chain decisions including the innovation investment, whereas the other two contracts may result in underinvestment in innovation. However, the downstream manufacturer does not always prefer the revenue-sharing contract; the manufacturer's profit can be higher with a quality-dependent wholesale price contract than with a revenue-sharing contract, specifically when the upstream supplier's innovation cost is low. We then extend our model to incorporate upstream competition between suppliers. By inviting upstream competition, with the wholesale price contract, the manufacturer can increase his profit substantially. Furthermore, under upstream competition, the revenue-sharing contract coordinates the supply chain, and results in an optimal contract form for the manufacturer when suppliers are symmetric. We also analyze the case of complementary components suppliers, and show that most of our results are robust.

Studying the operational motivation of a retailer to publicly announce his forecast information, this paper shows that by making forecast information publicly available to both his manufacturer and to the competitor, a retailer is able to credibly share his forecast information-an outcome that cannot be achieved by merely exchanging information within the supply chain. We model a market comprised of an incumbent supply chain facing the possible entry of a competing supply chain. In each supply chain, a retailer sources the product from a manufacturer, and the manufacturers must secure capacity prior to the beginning of the selling season. Due to the superior knowledge of the incumbent retailer about the consumer market, he privately observes a signal about the consumer's demand which may be high or low. We …rst con…rm that the retailer cannot credibly share this forecast information only with his manufacturer within the supply chain, since regardless of the observed signal, the retailer has an incentive to in ‡ate in order to induce the manufacturer to secure a high capacity level. However, when the information is also shared with the competitor, the incumbent retailer faces the trade-o¤ between the desire to secure an ample capacity level and the fear of intense competition. By making information publicly available, it is possible to achieve truthful information sharing; an incumbent retailer observing a high forecast bene…ts from the increased capacity level to such an extent that he is willing to engage in intense competition to prove his accountability for the shared information. On the other hand, an incumbent retailer with a low forecast is not willing to engage in intense competition in exchange for the high level of capacity; thus, he truthfully reveals his low forecast to weaken competition. Moreover, we demonstrate that this public information sharing can bene…t all the …rms in the market as well as consumers. In addition, we show that compared to the advance purchase contract, all the …rms except the incumbent manufacturer can be better-o¤ using public information sharing under a simple wholesale price contract.

By software vendors offering, via the cloud, software-as-a-service (SaaS) versions of traditionally on-premises application software, security risks associated with usage become more diversified. This can greatly increase the value associated with the software. In an environment where negative security externalities are present and users make complex consumption and patching decisions, we construct a model that clarifies whether and how SaaS versions should be offered by vendors. We find that the existence of version-specific security externalities is sufficient to warrant a versioned outcome, which has been shown to be suboptimal in the absence of security risks. In high security-loss environments, we find that SaaS should be geared to the middle tier of the consumer market if patching costs and the quality of the SaaS offering are high, and geared to the lower tier otherwise. In the former case, when security risk associated with each version is endogenously determined by consumption choices, strategic interactions between the vendor and consumers may cause a higher tier consumer segment to prefer a lower inherent quality product. Relative to on-premises benchmarks, we find that software diversification leads to lower average security losses for users when patching costs are high. However, when patching costs are low, surprisingly, average security losses can increase as a result of SaaS offerings and lead to lower consumer surplus. We also investigate the vendor’s security investment decision and establish that, as the market becomes riskier, the vendor tends to increase investments in an on-premises version and decrease investments in a SaaS version. On the other hand, in low security-loss environments, we find that SaaS is optimally targeted to a lower tier of the consumer market, average security losses decrease, and consumer surplus increases as a result. Security investments increase for both software versions as risk increases in these environments.

We study a supply chain comprised of a retailer who sources a product from a manufacturer. The retailer has superior information about the market demand, and the manufacturer must build the capacity and set the wholesale price prior to observing demand realization. We explore the level of information the retailer can share with the manufacturer by means of cheap talk. We first analyze a case in which the demand distribution is discrete and show that under mild conditions, the supply chain participants can exchange information truthfully. This result stands in sharp contrast with the existing literature which shows that in a static model without behavioral concerns, such as trust, the retailer tends to manipulate the demand forecasting information; hence, information cannot be shared truthfully under a wholesale price contract. The underlying reason for this result is the fact that the manufacturer undertakes multiple actions based on the information received from the retailer; for example, she makes the operational decision of setting the capacity level as well as the marketing decision of setting the wholesale price. When sharing information, the retailer must consider the trade-off between his incentive to inflate the shared information in order to encourage the manufacturer to increase the capacity level, and to deflate the forecast information, which results in a reduced wholesale price. We demonstrate that these countervailing incentives can balance each other and lead to a truthful information exchange. We also show that information sharing can hurt the supply chain. For more general continuous demand distributions, we first find that full information sharing is not possible. We then demonstrate that by sharing sub-interval information, the supply chain partners can still reach some level of partial information exchange. Finally, we illustrate via a numerical study that as the manufacturer's capacity build-up cost increases, her profit can increase as well, since it encourages the retailer to share more information with the manufacturer.