The Benefits of Downstream Information Acquisition

This study investigates the effects of turning terabytes of raw retail data into managerial insights (i.e., downstream information acquisition) in a strategic channel setting. Two effects of information acquisition are identified—the efficiency effect that improves retail pricing decision making in an uncertain environment, and the strategic effect whereby the retailer voluntarily discloses the acquired private information to influence the upstream manufacturer's wholesale pricing behavior. It is shown that the efficiency effect benefits the retailer without affecting the manufacturer, while the strategic effect works to the detriment of the retailer but to the advantage of the manufacturer. Nevertheless, unobservable information acquisition can mitigate the retailer's loss and the manufacturer's benefit from the strategic effect of information disclosure. Moreover, an increasing expected information acquisition cost may benefit the retailer, when that cost is low and information acquisition is unobservable to the manufacturer. The implications of this paper can shed light on how firms interact in a channel where the downstream market is data intensive, but information gleaning is costly.