18.12.2020

Market Strategies: Manufacturers, Retailers, and Consumers

GUAN, Xu | 陈滢儒

Supply chains are an integral part of business and form the network between a company and its suppliers to produce and distribute products to consumers. A supply chain also often contains various forms of information asymmetry (where one party has more information than the other) that drive business transactions. A manufacturer usually has less information regarding consumer preferences than the retailer, thus, to make more efficient business decisions, manufactures should try to resolve market uncertainties and understand consumers better. Today, manufacturers can recognise market demand beyond the retailer by gathering consumer data and market information from various sources, called information acquisition. At the same time, a retailer is commonly uncertain about the manufacturer’s product quality, which prevents the retailer from purchasing enough products from the manufacturer. In response, a manufacturer often invests significant resources in verifying the quality of its products to enhance retailers’ awareness, called quality disclosure. Indeed, these two strategies are extremely important, and firms regularly use both to resolve issues with asymmetric consumer and quality information.

According to the literature, market research for customised products with intense market competition accounts for almost 50% of a company’s net revenue. However, despite this, it is unclear how information acquisition and disclosure interact with each other, how they influence pricing and purchase decisions, and whether they improve a firm’s payoff in the supply chain. To fill this knowledge gap, a recent study by Xu Guan and Ying-Ju Chen investigates the interactions between a manufacturer’s information acquisition and quality disclosure strategies in a supply chain setting, in which the manufacturer privately knows his product quality but is uncertain about consumer preferences, while the retailer can confirm the customer type they are engaged with but cannot access the exact quality level of the products. Specifically, the authors ask: How does a retailer make rational inferences from the manufacturer’s joint information acquisition and disclosure decisions? Given retailer speculation, when should a manufacturer choose to acquire market information? How do firms’ equilibrium payoffs react to the various acquisition options, disclosure cost, and customer heterogeneity?

The first to integrate information acquisition and quality disclosure, the study generates novel insights for firms’ joint marketing, pricing, and ordering strategies. They argue that a manufacturer should treat the two as a combined process, since “these decisions can significantly influence a retailer’s rational inferences about product quality and can have conflicting effects on their own profitability”. Moreover, while information acquisition allows manufacturers to come up with improved pricing and quality disclosure strategies, the authors demonstrate that it also leaks certain product information to the retailer, thereby helping the retailer better estimate product quality. This leads to certain unintended implications regarding the manufacturer’s equilibrium strategies, for example, they may decide not to acquire any market information, even when such information can be had for no cost—which, as the authors point out, contrasts with conventional wisdom. They also find that the adverse effects of acquisition highly depend on the cost of disclosure and consumers’ quality preference differentiation. As they explain, “Increased consumer preference differentiation may have a non-monotonic relationship with the manufacturer’s profit, and information acquisition can become detrimental to the manufacturer once the disclosure cost is sufficiently high.

While Xu Guan and Ying-Ju Chen both agree that an interesting avenue of future research would be to consider the influence of market competition, they feel that their study provides and easy-to-use guide for firms to design effective information acquisition and quality disclosure strategies.

陈滢儒

Professor
Information Systems, Business Statistics & Operations Management