Strategic Communication in a Supply Chain with Copycat Threat

Problem definition: Outsourcing is a common operations strategy nowadays, but it may lead to an unintended consequence of supplier copycatting. When outsourcing, there is some subtle information that the manufacturer knows but is optional for the supplier to carry out the production task, such as how fit this product is to the market trend (product fit). The goal of this paper is to examine the impact of supplier copycatting in the presence of information asymmetry on product fit.Relevance: Prior research on information disclosure does not consider our unique yet practical business context that the supplier has the option of copycatting, and this setting is the main driver for our results.Methodology: We use a game-theoretical model to examine a manufacturer that outsources its production to a supplier. The manufacturer has private information on product fit during the production stage, and it decides whether or not to disclose this piece of information to the supplier. The supplier decides whether or not to exert production process enhancement effort and whether or not to enter the market with a copycat. Product fit information becomes public during the selling season.Results: We discover two novel disclosure structures: (1) only disclose the intermediate range product fit information, and (2) always withhold information even though disclosure is costless. This is a theoretical contribution to the classic unraveling theory. We also find that the manufacturer can be better off, while the supplier can be worse off, from the supplier copycatting option.Managerial Implications: Our work lends support to the practitioners' recommendation that the manufacturer should withhold some crucial information from the supplier and keep the communication as basic as possible. We also find the practitioners' recommendation that the manufacturer should always sign an IP agreement with its supplier to be ineffective