Strategic ignorance: Managing endogenous demand in a supply chain

This paper studies a supply chain in which a manufacturer sells a product to consumers through a retailer. The retailer makes an endogenous demand improvement decision on whether or not to increase the potential market base, which is imperfectly observed by the manufacturer. Two common contract types, wholesale price and two-part tariff, are studied. The paper studies how the manufacturer's capability to acquire demand information affects the retailer's demand investment decision as well as each firm's profit. We find that the retailer benefits from the manufacturer's increased capability to acquire demand information, i.e., the more accurate the manufacturer's demand information, the higher the retailer's profit. We also show that when the manufacturer can choose the level at which it can acquire demand information, it prefers not to acquire demand information at all under wholesale price contracts and not to acquire perfect demand information under two-part tariff contracts. Our results offer some new insights into how a manufacturer's capability to acquire demand information and a retailer's demand investment decision interact in a supply chain and challenge some well-established results in the exiting literature. (c) 2022 Elsevier Ltd. All rights reserved.