Should Firms Conceal Information When Dealing with Common Suppliers? Aditya Jain, Milind Sohoni Operations Management, Indian School of Business, Hyderabad 500032, India Received 2 June 2013; revised 24 October 2014; accepted 26 October 2014 DOI 10.1002/nav.21609 Published online 29 November 2014 in Wiley Online Library (wileyonlinelibrary.com). Abstract: A firm making quantity decision under uncertainty loses profit if its private information is leaked to competitors. Outsourcing increases this risk as a third party supplier may leak information for its own benefit. The firm may choose to con- ceal information from the competitors by entering in a confidentiality agreement with the supplier. This, however, diminishes the firm’s ability to dampen competition by signaling a higher quantity commitment. We examine this trade-off in a stylized supply chain in which two firms, endowed with private demand information, order sequentially from a common supplier, and engage in differentiated quantity competition. In our model, the supplier can set different wholesale prices for firms, and the second-mover firm could be better informed. Contrary to what is expected, information concealment is not always beneficial to the first mover. We characterize conditions under which the first mover firm will not prefer concealing information. We show that this depends on the relative informativeness of the second mover and is moderated by competition intensity. We examine the supplier’s incentive in participating in information concealment, and develop a contract that enables it for wider set of parameter values. We extend our analysis to examine firms’ incentive to improve information. © 2014 Wiley Periodicals, Inc. Naval Research Logistics 62: 1–15, 2015 Keywords: supply chain competition; information sharing; games with asymmetric information 1. INTRODUCTION Firms in the electronics manufacturing industry regularly outsource production of specialized components to suppliers. Outsourcing allows these firms to focus on their competency of product design, development, and marketing [8], while simultaneously enjoy scale efficiencies created by their sup- pliers who pool production of components across multiple firms [25, 8]. In such settings, a major concern for a firm which relies on suppliers, is the leakage of its private infor- mation about market demand to competing firms through common suppliers. This problem could be specially acute if the market demand is uncertain. Indeed, in recent years, this issue has attracted substantial attention from researchers in operations management [1, 15]. A commonly used strategy to counter this potential disadvantage is to enforce concealment of private information through confidentiality agreements with suppliers [20]. However, such concealment may not be as effective as information may leak through how the sup- plier uses this information in its decisions. Past research, primarily done under simultaneous move competition, has shown that such “indirect leakage” may lead to unexpected Correspondence to: Aditya Jain (aditya_jain@isb.edu) Additional Supporting Information may be found in the online version of this article. outcomes for a supply chain [15, 11]. Further, when firms place orders sequentially, concealment of information may limit the first mover’s ability to signal its “quantity commit- ment.” In this article, we examine the efficacy of enforcing information concealment in a setting where firms who buy from a common upstream supplier engage in sequential move competition, and information could be leaked directly as well as indirectly. In several situations, firms who compete in the market may end up making their quantity and procurement deci- sions sequentially because of several extraneous reasons. For example, in many situations a firm planning to launch a new product may face a lag between its plan becoming public and the actual launch. This allows competing firms to get ready with their similar offerings around the prod- uct launch. Indeed, when launching the first iPhone in 2007, Apple had announced the new product much earlier than the eventual launch, and in the interim competitors could pre- pare to launch similar devices [4, 19]. 1 Furthermore, it is not clear that in this case the first mover, that is, Apple, was necessarily better informed about product’s market potential 1 It is reasonable to think that Apple’s orders for components and assembly capacity preceded those of its competitors. © 2014 Wiley Periodicals, Inc.