Sharing Forecast Information in a Long-term Supply Chain Relationship

Forecast sharing in a supply chain using linear price contracts often leads to inefficiencies as the buyer has an incentive to inflate demand forecasts to ensure sufficient supply. Recent research in supply chain contracting has focused on one-shot relationships, and has identified various contracts that align incentives in the supply chain and induce the buyer to reveal forecast information truthfully. In this paper, we investigate the effect of having an infinitely repeated supplier relationship in achieving supply chain coordination. We analyze a capacity game with forecast sharing under information asymmetry. We establish conditions under which a buyer operating with a linear price contract reveals demand information truthfully with his supplier, who in turn allocates system-optimal capacity, both assuming that their business relationship is long-term. We show that in a repeated forecast sharing game coordination can be achieved when the industry is stable, both parties value their long-term relationship, and over-forecasting is easy to detect. ∗Operations and Technology Management Department, Boston University School of Management. †Operations and Information Management Department, The Wharton School, Univ. of Pennsylvania. ‡Marketing Group, Haas School of Business, University of California-Berkeley.