Abstract: With the advance of information technology, it is common for firms in a supply chain to share information. Many large retailers, including Wal-Mart and Target, have started to share sales data with their upstream manufacturers. When a manufacturer receives demand information from a retailer, it may improve its cost reduction planning to make the supply chain more competitive and profitable. However, the retailer may be reluctant to share information for dreading that the manufacturer would abuse the information to gain an advantage in future price bargaining. Despite the popularity of production cost reduction in practice, its impact on incentives for information sharing has rarely been explored in literature. Meanwhile, the existing literature involved information sharing values in supply chains is usually based on the assumption of risk-neutral decision-makers.
A supply chain with a risk-natural manufacturer and a risk-averse retailer who faces a stochastic price-dependent demand is considered. Before the selling season, the retailer obtains a signal and forecasts demand, while the manufacturer exerts effort to reduce her unit production cost. The following research questions are addressed. When will the retailer be willing to share its demand information with/without production cost reduction? When will the manufacturer invest in production cost reduction? How forecasting accuracy influences the supply chain members' decisions and utilities under different information sharing strategies and cost reduction investment strategies? How do these questions depend on cost reduction efficiency and the retailer's risk attitude?
To address these questions, a three stage game model is established to study the participants' equilibrium decisions. In the first stage, the retailer decides information sharing strategies before observing demand signal. In the second stage, the manufacturer determines the wholesale price (and cost reduction investment level if it is beneficial for the manufacturer) based on available demand signal. In the third stage, given the wholesale price and cost reduction investment level, the retailer decides the selling price. Based on different information sharing strategies and cost reduction investment strategies (with/without information sharing, with/without cost reduction), four decision-making models are analyzed. Firstly, by solving each model, the impacts of the degree of risk aversion for the retailer on the decisions and utilities of supply chain members are investigated by improving the information forecasting accuracy. The results illustrate that the improvement of the forecasting accuracy benefits the supply chain members under certain conditions. Secondly, by comparing the four models, the impact of the manufacturer's cost reduction investment strategy and the degree of risk aversion for the retailer on information sharing strategies are examined. Our findings show that the manufacturer is always better off with information sharing and/or cost reduction. However, the retailer is better off with information sharing only when the cost reduction policy is adopted and the effectiveness of investment is relatively low. Finally, the equilibrium strategy under certain conditions is obtained. It is found that (no) information sharing and cost reduction is the equilibrium when the cost reduction efficiency is relatively (low) high, which indicates that cost reduction may be a driving factors for information sharing.

Key words: demand forecasting, information sharing, cost reduction, risk aversion