Partial Vertical Ownership, Capacity Investment and Information Exchange in a Supply Chain

Partial vertical ownership describes a situation in which a firm holds financial shares in either its supplier (referred to as partial backward integration) or its customer (partial forward integration). We study the effect of such financial interconnectedness on two operational decisions: capacity investment and information exchange. In our model, a retailer, who has superior information about the future market demand, has passive financial holdings in the supplier. Although this passive financial investment does not enable the retailer to directly influence the supplier’s operational decisions, it does affect the market equilibrium. Specifically, financial interconnectedness between the firms can result in the retailer financing the entire capacity in the market. In addition, we characterize the conditions that ensure that information between the retailer and the supplier can be exchanged via cheap-talk communication. Interestingly, a high level of information asymmetry facilitates the exchange of information via cheap talk in the presence of these financial links. When cheap talk is not possible, we study the separating equilibrium that is achieved through the retailer’s commitment to order in advance. In this case, the separating quantity can either increase or decrease with the level partial vertical ownership, and this trend does not depend the actual level of the financial holdings. We further analyze the incentive of the retailer to conceal demand information by choosing a pooling equilibrium and conclude with discussing the effect of the financial interconnectedness on the parties’ operational payoffs. This paper was accepted by Jayashankar Swaminathan, operations management. Funding: N. Shamir gratefully acknowledges financial support from the Israel Science Foundation [Grant 2358/22] and The Henry Crown Institute of Business Research in Israel. T. Avinadav gratefully acknowledges financial support from the Israel Science Foundation [Grant 1571/20]. Supplemental Material: Data and the electronic companion are available at https://doi.org/10.1287/mnsc.2023.4673 .

[1]  Ruichang Lu,et al.  Frenemies: Corporate Advertising Under Common Ownership , 2021, Manag. Sci..

[2]  Ö. Özer,et al.  Are We Strategically Naïve or Guided by Trust and Trustworthiness in Cheap-Talk Communication? , 2020, Manag. Sci..

[3]  Tatyana Chernonog,et al.  Revenue-sharing between developers of virtual products and platform distributors , 2021, Eur. J. Oper. Res..

[4]  Tal Avinadav,et al.  The effect of information asymmetry on ordering and capacity decisions in supply chains , 2020, Eur. J. Oper. Res..

[5]  Yossi Aviv,et al.  Financial Cross-Ownership and Information Dissemination in a Supply Chain , 2020, Manuf. Serv. Oper. Manag..

[6]  Sreekumar R. Bhaskaran,et al.  Sequential Product Development and Introduction by Cash-Constrained Start-Ups , 2018, Manuf. Serv. Oper. Manag..

[7]  Tatyana Chernonog,et al.  Contract design when quality is co-created in a supply chain , 2020, Eur. J. Oper. Res..

[8]  Oded Berman,et al.  Truthful Cheap Talk: Why Operational Flexibility May Lead to Truthful Communication , 2019, Manag. Sci..

[9]  Y. Spiegel,et al.  Partial Vertical Integration, Ownership Structure, and Foreclosure , 2018 .

[10]  Martin C. Schmalz Common Ownership Concentration and Corporate Conduct , 2018, Annual Review of Financial Economics.

[11]  Tunay I. Tunca,et al.  Buyer Intermediation in Supplier Finance , 2017, Manag. Sci..

[12]  Vishal Gaur,et al.  Operational Investment and Capital Structure Under Asset-Based Lending , 2017, Manuf. Serv. Oper. Manag..

[13]  John R. Birge,et al.  Trade Credit, Risk Sharing, and Inventory Financing Portfolios , 2017, Manag. Sci..

[14]  Guoming Lai,et al.  Inventory Decisions and Signals of Demand Uncertainty to Investors , 2012, Manuf. Serv. Oper. Manag..

[15]  Özalp Özer,et al.  Information Sharing, Advice Provision, or Delegation: What Leads to Higher Trust and Trustworthiness? , 2018, Manag. Sci..

[16]  Jing-Sheng Song,et al.  Effect of partial cross ownership on supply chain performance , 2017, Eur. J. Oper. Res..

[17]  Guoming Lai,et al.  Trade Credit in Competition: A Horizontal Benefit , 2016, Manuf. Serv. Oper. Manag..

[18]  Nikolaos Trichakis,et al.  Is Operating Flexibility Harmful under Debt? , 2015, Manag. Sci..

[19]  Jiri Chod,et al.  Inventory, Risk Shifting, and Trade Credit , 2015, Manag. Sci..

[20]  Hyoduk Shin,et al.  Strategic Communication for Capacity Alignment with Pricing in a Supply Chain , 2013, Manag. Sci..

[21]  Christopher S. Tang,et al.  Handbook of Information Exchange in Supply Chain Management , 2017 .

[22]  Lin Tian,et al.  Comment on "Strategic Information Management Under Leakage in a Supply Chain" , 2017, Manag. Sci..

[23]  Onesun Steve Yoo,et al.  Optimal Time Allocation for Process Improvement for Growth-Focused Entrepreneurs , 2016, Manuf. Serv. Oper. Manag..

[24]  Lin Tian,et al.  To Share or Not to Share: Demand Forecast Sharing in a Distribution Channel , 2015, Mark. Sci..

[25]  Hyoduk Shin,et al.  Public Forecast Information Sharing in a Market with Competing Supply Chains , 2012, Manag. Sci..

[26]  Onesun Steve Yoo,et al.  The Time-Money Trade-Off for Entrepreneurs: When to Hire the First Employee? , 2011, Manuf. Serv. Oper. Manag..

[27]  Richard K. Lai,et al.  Signaling to Partially Informed Investors in the Newsvendor Model , 2015 .

[28]  Hyoduk Shin,et al.  The Perils of Sharing Information in a Trade Association under a Strategic Wholesale Price , 2014 .

[29]  Jiri Chod,et al.  Resource Flexibility and Capital Structure , 2012, Manag. Sci..

[30]  D. Schiereck,et al.  Effects of corporate equity ownership on firm value , 2013 .

[31]  Hao Zhang,et al.  Revenue Sharing and Information Leakage in a Supply Chain , 2012, Manag. Sci..

[32]  Stuart L. Gillan,et al.  Product Market Competition in a World of Cross-Ownership : Evidence from Institutional Blockholdings Jie , 2013 .

[33]  Jun Yang,et al.  Supply Chain Performance under Market Valuation: An Operational Approach to Restore Efficiency , 2011, Manag. Sci..

[34]  Y. Spiegel,et al.  Bertrand competition when firms hold passive ownership stakes in one another , 2012 .

[35]  Laurens G. Debo,et al.  Channel Stuffing with Short-Term Interest in Market Value , 2011, Manag. Sci..

[36]  Özalp Özer,et al.  Trust in Forecast Information Sharing , 2009, Manag. Sci..

[37]  Morris A. Cohen,et al.  Information Sharing in a Long-Term Supply Chain Relationship: The Role of Customer Review Strategy , 2010, Oper. Res..

[38]  Manu Goyal,et al.  Strategic Information Management Under Leakage in a Supply Chain , 2009, Manag. Sci..

[39]  Albert Y. Ha,et al.  Contracting and Information Sharing Under Supply Chain Competition , 2008, Manag. Sci..

[40]  Lode Li,et al.  Confidentiality and Information Sharing in Supply Chain Coordination , 2005, Manag. Sci..

[41]  Özalp Özer,et al.  Strategic Commitments for an Optimal Capacity Decision Under Asymmetric Forecast Information , 2006, Manag. Sci..

[42]  Charles J. Hadlock,et al.  Corporate Equity Ownership and the Governance of Product Market Relationships , 2005 .

[43]  Volodymyr Babich,et al.  Pre-IPO Operational and Financial Decisions , 2004, Manag. Sci..

[44]  A. Raskovich,et al.  Partial Vertical Ownership , 2004 .

[45]  Yossi Spiegel,et al.  Partial Cross Ownership and Tacit Collusion , 2005 .

[46]  Morris A. Cohen,et al.  Measuring Imputed Cost in the Semiconductor Equipment Supply Chain , 2003, Manag. Sci..

[47]  Eric T. Anderson,et al.  A Bargaining Theory of Distribution Channels , 2003 .

[48]  Lode Li Information Sharing in a Supply Chain with Horizontal Competition , 2002, Manag. Sci..

[49]  Gérard P. Cachon,et al.  Contracting to Assure Supply: How to Share Demand Forecasts in a Supply Chain , 2001, Manag. Sci..

[50]  Christopher S. Tang,et al.  The Value of Information Sharing in a Two-Level Supply Chain , 2000 .

[51]  Steven Tadelis,et al.  Incentives Versus Transaction Costs: A Theory of Procurement Contracts , 2001 .

[52]  Jeffrey W. Allen,et al.  Corporate Equity Ownership, Strategic Alliances and Product Market Relationships , 1999 .

[53]  Preyas S. Desai,et al.  Demand signalling under unobservable effort in franchising: linear and nonlinear price contracts , 1995 .

[54]  Andrew Postlewaite,et al.  Belief-Based Refinements in Signalling Games , 1993 .

[55]  David M. Kreps,et al.  Signaling Games and Stable Equilibria , 1987 .

[56]  J. Sobel,et al.  STRATEGIC INFORMATION TRANSMISSION , 1982 .

[57]  R. Myerson Incentive Compatibility and the Bargaining Problem , 1979 .

[58]  J. Spengler Vertical Integration and Antitrust Policy , 1950, Journal of Political Economy.