Limited information sharing between retailers and their suppliers represents a critical bottleneck in the performance of supply chains. Working with a colleague, HKUST’s Hongtao Zhang proposes a novel wholesale pricing mechanism that will benefit both retailers and manufacturers and ultimately enhance supply chain efficiency.

“Advances in information technology have enabled retailers to routinely and efficiently acquire rich market data,” the researchers note. Such data provide valuable information on future demand to improve supply chain decision-making. In practice, however, many retailers are reluctant to share data with their suppliers due to concerns about pricing.

“Retailers resist sharing point-of-sale data because they fear that the producer/supplier will use the data to adjust the wholesale price to hurt them,” the authors elaborate. However, research on supply chain information sharing often assumes that the manufacturer can unilaterally set any wholesale price. This model fails to consider certain win–win opportunities that could arise from information sharing.

The researchers offer an innovative solution. “In response to practical challenges like the above,” they say, “we propose and investigate a novel and easily implementable wholesale pricing mechanism that promotes information sharing between a weaker retailer and a more powerful manufacturer such that both parties become better off.”

The novel feature of this mechanism is an extra stage of interaction that occurs before the retailer decides whether to share information. “The manufacturer and the retailer reach a contractual agreement on an upper bound which the wholesale price will not exceed if the retailer shares his information,” the researchers explain. By creating a win–win situation, this mechanism helps build trust between the two firms.

“We see good potential that bounded wholesale pricing can be put into practice to help both upstream and downstream firms,” conclude the researchers. Their work also offers numerous possible extensions, such as considering different supply chain configurations, cost structures, and information structures.