Does private information about inventories matter?

We study the impact of multilateral private information about inventory levels in twoechelon supply chain environments. We find that greater bargaining power of the downstream chain member promotes the efficiency of supply chain in terms of operational cost. More specifically, we focus on two polar cases: i) multiple suppliers with limited inventories supplying to a single retailer; and ii) a single supplier with limited inventory serving multiple retailers. In the former case, we show that the optimal inventory policy of the centralized cost minimization problem can be implemented even in the presence of private information, and the retailer can appropriate the full cost reduction of the entire supply chain. In the latter case, the centralized solution is not feasible in general. The contract that is optimal for the supplier can be interpreted as a simple ranking allocation rule, based on critical quantiles of an adjusted demand distribution that accounts for the incentives generated by the presence of private information. This rule reverses the order of all served retailers’ inventory positions, and may “overshoot” the positions of some retailers, i.e. push them beyond their optimal levels without private information.