Hierarchical quality disclosure in a supply chain with cost heterogeneity

Abstract This paper investigates a two-layer information disclosure model in the supply chain, wherein a manufacturer privately observes his product quality and delegates the sales responsibility to an independent retailer who possesses the pricing power. In the presence of information asymmetry, either the manufacturer or the retailer can determine whether to costly disclose the product quality information to the consumer. We show that in equilibrium both firms strategically select their disclosure options according to the disclosure costs and the ex-post quality level, thereby leading to some unintended phenomena. The retail price, the retailer's and the supply chain's payoffs may increase simultaneously when the product quality goes down. The decentralized supply chain can generate a higher ex-post payoff than the integrated supply chain once the product quality is sufficiently low. We also examine the impact of disclosure costs on the supply chain's ex-ante payoff, and find that it is more beneficial for a single firm to afford the entire disclosure costs in the channel. Moreover, with revenue sharing contract this allocation of disclosure costs can give rise to a higher supply chain's payoff than that in the integrated supply chain.