On the optimality of information sharing between integrated and vertically separated competitors

Abstract

A manufacturer relies on an exclusive subcontractor for production and competes horizontally against an integrated rival that produces in‐house. The exclusive agent is privately informed about the marginal cost of production. When marginal costs are correlated across companies, information sharing benefits both companies due to reduced uncertainty, but it affects the contracting terms within the vertical hierarchy and creates horizontal externalities between companies. We show that the manufacturer who suffers from agency cost benefits more from sharing information than his rival performing in‐house production only when costs are highly correlated, and in this case, information sharing may actually benefit consumers.