The Perils of Sharing Information in a Trade Association under a Strategic Wholesale Price

We study the incentives of a group of retailers, organized as a trade association and sourcing the product from a single manufacturer, to exchange private forecast information. We compare two widely used policies by the trade association in practice: exclusionary information exchange and non-exclusionary information exchange. Under the exclusionary policy, only retailers who contribute their private information are exposed to the pool of shared information, whereas under the non-exclusionary policy, all of the members of the trade association are exposed to the pool of shared information regardless of any contribution to this pool. We show that when the wholesale price is exogenous, the retailers have an incentive to share information under both policies. However, when the manufacturer is aware of the exchange of information among the retailers, she sets the wholesale price more aggressively, even without being exposed to the actual shared information. This wholesale pricing effect reduces the retailers' incentives to share information to such extent that under the non-exclusionary policy, no information is shared in equilibrium. Under the exclusionary policy, it is possible to reach a full information-sharing equilibrium, but this equilibrium can make the retailers worse-off compared with the case in which no information is shared. Furthermore, it is also possible for the manufacturer to become worse-off when the retailers share information. We also discuss the effect of market size on the incentives of the retailers to exchange information and how by committing to a certain wholesale price level early, the manufacturer can induce the retailers to exchange information.