For better or worse: Impacts of information leakage by a common supplier with innovation imitation of downstream firms

https://doi.org/10.1016/j.tre.2023.103020Get rights and content

Highlights

  • Incumbent and entrant order a component sequentially from a common supplier.

  • Incumbent has private innovation value information that is unknown to entrant.

  • Entrant can imitate incumbent’s innovation, and supplier may leak incumbent’s order.

  • Information leakage may achieve win–win–win for supplier, incumbent, and entrant.

  • Information sharing agreement can be achieved between incumbent and entrant.

Abstract

This paper considers a supply chain structure where an incumbent and an entrant order a critical component sequentially from a common supplier. The incumbent introduces an innovative product whose innovation value is its private information, and the entrant strategically chooses to either imitate the incumbent’s innovation at a cost or introduce a regular product without imitation. The supplier can choose whether or not to leak the incumbent’s order quantity to the entrant. This paper theoretically investigates the interplay between information leakage and innovation imitation, and examines the impacts of information leakage on the channel entities. We find that the entrant always imitates the innovation when the imitation cost is low, and imitation benefits the supplier but damages the incumbent. In the absence of incumbent’s quantity distortion, the supplier is more likely to leak the information except when the entrant’s imitation cost is moderate and the imitation ability is strong; however, its willingness to abandon information leakage increases in the presence of quantity distortion. Different from previous studies, our results suggest that quantity distortion enables a win–win–win outcome for supply chain members, all of whom have consistent preferences on information leakage. Besides, an information sharing agreement can be achieved between the incumbent and the entrant, which is beneficial to the supplier as well.

Introduction

With the advent of large contract manufacturers and specialized key input producer, competing firms in the electronics manufacturing industry regularly source a critical component from a common supplier, taking advantage of the cost efficiency and/or scale economies of the external supplier (Wen et al., 2022). For example, both Apple and Samsung source ceramic capacitors from Murata; Sony supplies CMOS sensors to a variety of smart phone manufacturers including Apple, Samsung, Huawei, Oppo, etc (Hu et al., 2022). Practically, the competing firms may end up making their quantity and procurement decisions sequentially in several situations, owing to the following reasons. One is that there always exists a time lag between the announcement of a new product and the actual launch for the first mover (incumbent), meanwhile other competing followers (entrants) could be able to imitate and offer similar products. Apple experienced a six-months time period between the announcement of its first iPhone and the eventual product launch, enabling its competitors to prepare similar devices in the meantime (Chen, 2009, Jain and Sohoni, 2015). The other reason lies in the fact of stronger pre-existing relationships of the first mover with suppliers, which gives the first mover preferential treatment in securing supplies than the other followers (Jain and Sohoni, 2015). For instance, AMD has signed a contract with SK Hynix (a chip supplier) that gives AMD priorities in terms of supply, that is, SK Hynix has to guarantee AMD’s requirements before shipping its chips to other firms (Shilov, 2015).

Production innovation is particularly critical in electronics manufacturing industry with high turnover, which is highly valued by both incumbent and entrant firms. As the incumbent usually has a better understanding of its industry, it may be the first to introduce an innovative product. Also, it will conduct extensive up-front market research before product launch, and thus is more informed about the innovation value. To increase competitiveness, an entrant may invest in imitative products that embody similar technology or feature of the incumbent’s offering (Ofek and Turut, 2008). It has been pointed out that innovations are frequently imitated by followers in several industries such as fashion and software (Schnaars, 1994). The reason is that the imitators can enjoy a relatively low product cost due to the cost saving on market research (Hou et al., 2020), but it also comes with one critical drawback: less information about the innovation value of the product.

One may argue that the innovation value will be publicly known after the selling season when the feedbacks from customers are collected; however, due to the long lead time in production, the entrant needs to commit to its production schedule sufficiently in advance to the selling season to guarantee its market share. This process makes the entrant uninformed about the innovation value before making an order decision. As a result, there exists asymmetric information about the innovation value between the incumbent and the entrant. Taking iPhone X’s notch design as one example of innovation imitation: despite the controversy around the notched display screen, Apple firmly believed in its judgment of consumer and market reaction to its innovation value, and ultimately went ahead with the notched product which hit the market eventually (Hu et al., 2020). The notch design was widely imitated within 5–7 months of iPhone X’s first launch, mainly by some competitors such as Huawei and Oppo (but Samsung did not follow the suit). Besides, they share common suppliers with Apple (as the Sony case abovementioned).

In this sequential move competition, the informed incumbent faces the risk of the supplier leaking its quantity information to the competing entrant. Such information leakage can reveal the incumbent’s private information on innovation value to the entrant, because quantity decision are based on the private information. It has been supported by plenty of surveys that such indirect information leakage is a major concern for an incumbent that relies on common suppliers (Lee and Whang, 2000, Zhang and Li, 2006). Anand and Goyal (2009) summarized a common structure of information leakage: when one firm knows a second firm’s private information due to a vertical relationship, it may leak this information to a horizontally competing firm. In our framework where the informed incumbent and uninformed entrant order a component sequentially from a common supplier, information leakage arises when the supplier leaks the incumbent’s order information to the entrant who can then infer the incumbent’s private information accordingly.

The interaction of innovation imitation and information leakage will significantly affect the outcome of the three-player game among the supplier, the incumbent, and the entrant. Because of the high turnover of technology in electronics manufacturing industry, product innovation may be different in each updating cycle, but the game among them is similar. Thus, we focus on the interaction of innovation imitation and information leakage in one cycle, and raise the following questions:

1. What is the equilibrium innovation imitation strategy of the entrant with/without information leakage?

2. Does the supplier always benefit from information leakage?

3. What is the impact of information leakage on the incumbent and the entrant?

4. Will the incumbent and the entrant achieve an information sharing agreement after the incumbent receives its private information?

To address these research questions, we consider a supply chain framework where an incumbent and an entrant sequentially order a critical component from a common supplier via a wholesale price contract. The incumbent develops an innovative product at a sunk cost, and the entrant can strategically introduce an innovative product by imitating the incumbent’s innovation or a regular product without imitation. The incumbent is more informed than the entrant about the innovation value, as a result of its extensive market research before product introduction. However, the incumbent’s private information may be inferred by the entrant when the supplier leaks the incumbent’s order quantity. Before the wholesale price and order competition decisions, the supplier makes information leakage decision, and the entrant makes innovation imitation decision. Specifically, when the supplier leaks the information and the entrant imitates the innovation, a signaling game arises between the incumbent and the entrant, in which the incumbent may need to distort its decision to reveal the true information. We first derive the equilibrium innovation imitation strategy of the entrant with or without information leakage, then obtain the optimal information leakage strategy of the supplier. The impacts of information leakage on the incumbent and the entrant are examined. In addition, we further investigate whether an information sharing agreement between the incumbent and the entrant can be achieved after the incumbent receives its privation information.

The main results are summarized as follows. First, regardless of whether the supplier leaks the incumbent’s order information, the entrant always imitates the innovation when the imitation cost is less than a threshold, and its imitation behavior benefits the supplier but damages the incumbent. Second, information leakage leads to a higher wholesale price and order quantity from the incumbent, but a lower order quantity from the entrant, when the entrant imitates the innovation without incumbent’s quantity distortion or when it does not imitate. However, when the entrant imitates the innovation under quantity distortion, information leakage may lead to an opposite result if the entrant’s imitation ability is strong. Third, in the absence of quantity distortion, the supplier prefers information leakage in most parameter spaces, but will give up information leakage when the entrant’s imitation cost is moderate and the imitation ability is strong. The supplier’s willingness to give up information leakage increases in the presence of quantity distortion. Furthermore, the supplier, incumbent and entrant always have different preferences on information leakage without quantity distortion, but may have consistent preferences and achieve a win–win–win situation under quantity distortion. Besides, when the competition intensity, the entrant’s imitation ability, and the imitation cost are small under quantity distortion, the incumbent and the entrant may achieve an information sharing agreement after the incumbent receives its private information, and such an information sharing agreement also benefits the supplier.

The contributions of this work are as follows. First, we develop a game model to investigate the interaction between innovation imitation and information leakage, considering the possible imitation by an entrant and information leakage by a common supplier who receives sequential order from two competing firms (incumbent and entrant). This well characterizes business phenomenon and complements the existing research on information leakage. Second, consider the innovation value as the developer’s (incumbent’s) private information, and unknown to the competing follower (entrant). When the entrant imitates the innovation and the supplier leaks the incumbent’s order quantity to the entrant, a signaling game arises because the entrant can infer the incumbent’s private information from the leaked order quantity. This may lead to decision distortion, which has significant impacts on the interaction of information leakage and innovation imitation. We provide new insights into information management and innovation management by examining the distortion effect.

The remainder of this work is organized as follows: Section 2 reviews the related literature and Section 3 describes the model. Section 4 first presents the entrant’s equilibrium innovation imitation strategy under (no) information leakage, and then presents the supplier’s optimal information leakage strategy. The impacts of information leakage on the incumbent and the entrant are further analyzed. Section 5 examines whether an information sharing agreement between the incumbent and the entrant can be achieved. Section 6 briefly concludes and proposes extensions for future work. All proofs are presented in Appendix B.

Section snippets

Literature review

This study relates to three research streams: (innovation) imitation, information leakage, as well as information sharing in horizontal competition.

Our work is related to (innovation) imitation. Empirical evidence suggests that about 60% of successful innovations are imitated within four years (Mansfield et al., 1981). Most of the relevant literature focus on comparing the innovation strategy and imitation strategy (Makadok, 1998, Park et al., 2020, Zhou, 2006). Some argue that innovator (early

Model

Consider an incumbent (m) and an entrant (e) competing on quantities in the end market. Both firms source a critical component of the product from a common supplier (s) at a price of w, but place orders sequentially. The incumbent, as the Stackelberg leader, has developed an innovative product at a sunk cost and is commited to bring it to the market (Hu et al., 2020), and the entrant, as the follower, can introduce a regular product or an innovative product by imitating the leader’s innovation.

Analysis of two information leakage scenarios

We consider two information leakage scenarios: with or without information leakage (Y={K,N}), and explore the non-leakage case (Y=N) in Section 4.1 and the leakage condition (Y=K) in Section 4.2. For each scenario, we derive the entrant’ optimal innovation imitation behavior (Λ={1,0}). The supplier’s optimal information leakage strategy is then discussed in Section 4.3.

Information sharing agreement between incumbent and entrant

According to the previous analysis, we note that the incumbent may suffer from information leakage by the common supplier. To avoid this possible loss, we try to identify whether an information sharing mechanism works. Under such mechanism, the incumbent can decide whether to share its information with the entrant after it obtains the private information, and the entrant makes a take-it-or-leave-it decision.

The sequence of events in operational-interaction stage is as follows: The incumbent

Conclusion

An incumbent usually conducts extensive market research before introducing an innovative product, which endows it more information about innovation value. As the follower, an entrant may strategically choose whether or not to imitate the incumbent’s innovation, although it has little knowledge about the innovation value. Both the incumbent and the entrant order a critical component from a common supplier, who can leak the incumbent’s order information to the entrant such that the incumbent’s

Acknowledgments

This work was supported by National Key Research and Development Program No. 2021YFF0901300, National Natural Science Foundation of China Nos. 72231007, 71901173, 72071165, 72101201, 72201166, and Postdoctoral Research Foundation of China Nos. 3115200085 and 2020M683517, and Fundamental Research Funds for the Central Universities No. SK2022012.

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    Acknowledgments: This work was supported by National Key Research and Development Program, China No. 2021YFF0901300, National Natural Science Foundation of China Nos. 72231007, 71901173 and 72101201, Postdoctoral Research Foundation of China Nos. 3115200085 and 2020M683517, and Fundamental Research Funds for the Central Universities, China No. SK2022012.

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