In markets for fashion or seasonal goods, such as clothing and cosmetics, or markets characterized by proliferation of new products, such as cars and electronics, manufacturers and retailers both face a challenge. How can they know whether the product will appeal to consumers?

Manufacturers typically have more resources to find out this information through market research, product testing and the like. Because of this, they can potentially share this information to induce retailers to order higher quantities.

A formal game-theoretical model proposed by Liang Guo of HKUST and Ganesh Iyer of UC Berkeley examines information acquisition and sharing strategies that a manufacturer can use to influence the behavior of its retailer.

They work with two forms of information acquisition: 1) inflexible, meaning the manufacturer commits to collect an infinite amount of information or none at all; and 2) flexible, in which information is sequentially collected and as each new piece of information is received, the manufacturer decides whether to continue collecting or to stop.

The impact of these forms is determined by how the information is to be shared. The authors consider two sharing formats - mandatory and voluntary - and in both cases the manufacturer may have an incentive for "strategic ignorance." This means that if it looks like the shared information would result in fewer orders by the retailer, it is best not to share (or even collect) it.

Under mandatory sharing arrangements, which have been pursued by such companies as Kraft and Procter & Gamble, the manufacturer agrees to share the collected information with the retailer. This puts the manufacturer and the retailer on the same page in understanding consumer demand, but it does not give the manufacturer any apparent advantage. Therefore, to retain some control, the authors suggest that the manufacturer pursue a flexible information acquisition strategy.

"Mandatory sharing enables the manufacturer to manipulate the retailer's belief only through the control over the information acquisition process and thus they should acquire information only when this strategic control is available," they say.

"When the process is sequential, the manufacturer can exercise self-restriction in information acquisition and refrain from acquiring perfect information. To influence the retailer's belief, the manufacturer may terminate information collection either when the acquired information is sufficiently favorable or before an overly adverse outcome arises. As a result, 'strategic ignorance' is a new mechanism that can be used by firms to manage channel relationships."

Voluntary sharing arrangements, on the other hand, give the manufacturer the discretion to decide whether it wants to share the information after the content of the acquired information is revealed. This motivates the manufacturer to acquire more information. However, there is a caveat.

"Generating more information is a double-edged sword that can in equilibrium improve a manufacturer's ex ante payoff when and only when on average more retail ordering is induced," the authors say.

The findings are particularly relevant in terms of how manufacturers should respond to changes in information collection technologies. As they move from standard methods, such as mail surveys, to sequential acquisition, such as online surveys, the results suggest they should collect more information when they have committed to mandatorily share the information, but acquire less information when such commitment is not present.

"Firms that set up more formal mandatory arrangements for downstream sharing, such as Procter & Gamble, should generally be more conservative in information acquisition, especially when they don't have access to information collection technologies that afford sequential control over the data generation process," they say.

Moreover, if there is a lot of uncertainty about the product's appeal to consumers, it may be better to commit to mandatorily share information because this will be viewed favorably by the retailer. A number of successful mandatory arrangements have been documented in the fashion apparel and consumer electronics markets. "Mandatory sharing can serve as a self-disciplining device to acquire less information which may paradoxically induce the retailer to order higher amounts when the likelihood of product failure is high," they say.