Impact of demand correlation on the value of and incentives for information sharing in a supply chain

Research on information sharing partnerships between manufacturers and retailers in a supply chain is relatively recent. The research has generally focused on models involving a single retailer or multiple retailers with independent demands. We analyze the value of demand information sharing in a one manufacturer-N retailer model in which demands at the retailers during a time period may be correlated. We use the well known Shapley value concept from game theory to analyze the expected manufacturer and retailer shares of the surplus generated from information sharing. We find that demand correlation affects the magnitude and shape of the surplus function, which, in turn, impacts the relative incentives of the manufacturer and retailers to form such partnerships. Higher correlation increases (reduces) the manufacturer (retailer) surplus. However, the declining marginal manufacturer surplus under high correlation condition may induce the manufacturer to limit the number of retailer partners. The impact of correlation among retailer demands on the value of and incentives for information sharing can be explained using the substitutable and complementary nature of demand information when they are highly and weakly correlated respectively. (C) 2003 Elsevier Science B.V. All rights reserved.