Do Firms Invest in Forecasting Efficiently? The Effect of Competition on Demand Forecast Investments and Supply Chain Coordination

Abstract

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.

Trust, Trustworthiness, and Information Sharing in Supply Chains Bridging China and the United States

“…In contrast, studies with a strategic perspective focus on the impact of incentive conflicts on the effectiveness of forecast sharing. They aim to develop contracts to align the pecuniary incentives of different supply chain members and to identify supply chain conditions under which credible forecast information sharing is ensured (e.g., Cachon and Lariviere 2001,Özer and Wei 2006, Ha and Tong 2008, Ren et al 2010, Shin and Tunca 2010, Kurtuluş et al 2012, Gümüş 2013, Kong et al 2013. Özer et al (2011) are the first to examine forecast sharing from a behavioral perspective and demonstrate that individuals' inherent propensity to trust and to be trustworthy improves the efficacy of forecast sharing.…”

Teaching the Mechanism of Horizontal and Vertical Supply Chain Coordination

“…Due to the private information (Shin and Tunca, 2010) and the incentive of maximizing its own profits through deviating its actions from the optimal decisions from the whole supply chain perspective (Heese and Kemahlıoğlu-Ziya, 2016), many supply chains today haven't obtained the expected competitiveness (Xu and Gursoy, 2015). The actions of each stakeholder in the supply chain are dependent, and thus the non-optimal decision made from one stakeholder triggers a series of non-optimal decision of other stakeholders.…”

“…Supply chain coordination can resolve the misalignment of each stakeholder's incentive through motivating all of the parties make actions jointly according to the centralized decision (Shin and Tunca, 2010). The objective of the centralized decision is to maximize the benefits of the whole supply chain.…”

Incentives for Retailer Forecasting: Rebates vs. Returns

“…A companion paper to our own that considers retailers' endogenous forecasting decisions is Shin and Tunca (2009). However, the focus of their paper is very different.…”