THE MARKETING JOURNAL OF THE INSTITUTE FOR OPERATIONS RESEARCH AND THE MANAGEMENT SCIENCES

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1 THE MARKETING JOURNAL OF THE INSTITUTE FOR OPERATIONS RESEARCH AND THE MANAGEMENT SCIENCES Edtoral: It s Never Good-bye to Marketng Scence Erc T. Bradlow 963 The Sealed-Bd Abstracton n Onlne Auctons Robert Zethammer and Chrstopher Adams 964 Commentary: Bdders Experence and Learnng n Onlne Auctons: Issues and Implcatons Kannan Srnvasan and Xn Wang 988 Commentary: Do Bds Equal Values on ebay? Al Hortaçsu and Erc R. Nelsen 994 Rejonder: Causes and Implcatons of Some Bdders Not Conformng to the Sealed-Bd Abstracton Robert Zethammer and Chrstopher Adams 998 Onlne Demand Under Lmted Consumer Search Jun B. Km, Paulo Albuquerque, and Bart J. Bronnenberg 1001 Estmatng Cannbalzaton Rates for Poneerng Innovatons Harald J. van Heerde, Shuba Srnvasan, and Marnk G. Dekmpe 1024 The Economcs of Buyer Uncertanty: Advance Sellng vs. Probablstc Sellng Scott Fay and Jnhong Xe 1040 Optmal Reverse-Prcng Mechansms Martn Spann, Robert Zethammer, and Gerald Häubl 1058 Optmal Reverse Channel Structure for Consumer Product Returns Jeffrey D. Shulman, Anne T. Coughlan, and R. Canan Savaskan 1071 Customer-Base Analyss n a Dscrete-Tme Noncontractual Settng Peter S. Fader, Bruce G. S. Harde, and Jen Shang 1086 The Seeds of Dssoluton: Dscrepancy and Incoherence n Buyer Suppler Exchange Qong Wang, Ujwal Kayande, and Sandy Jap 1109 The Effects of Informaton Transparency on Supplers, Manufacturers, and Consumers n Onlne Markets Zach Zhzhong Zhou and Kevn Xaoguo Zhu 1125 Convertng Prates Wthout Cannbalzng Purchasers: The Impact of Dgtal Dstrbuton on Physcal Sales and Internet Pracy Brett Danaher, Samta Dhanasobhon, Mchael D. Smth, and Rahul Telang 1138 Search and Choce n Onlne Consumer Auctons Ernan Haruvy and Peter T. L. Popkowsk Leszczyc 1152 Statement from the Edtor Regardng New Perspectves on Customer Death Usng a Generalzaton of the Pareto/NBD Model Steven M. Shugan 1165 Focus on Authors 1166 Volume 29 Number 6 November December 2010

2 THE MARKETING JOURNAL OF THE INSTITUTE FOR OPERATIONS RESEARCH AND THE MANAGEMENT SCIENCES MARKETING SCIENCE Contents Volume 29 Number 6 November December Edtoral: It s Never Good-bye to Marketng Scence Erc T. Bradlow 963 The Sealed-Bd Abstracton n Onlne Auctons Robert Zethammer and Chrstopher Adams Bds n onlne auctons should not be analyzed as f the auctons were sealed-bd auctons. 964 Commentary: Bdders Experence and Learnng n Onlne Auctons: Issues and Implcatons Kannan Srnvasan and Xn Wang Bdders learn quckly n onlne auctons. 988 Commentary: Do Bds Equal Values on ebay? Al Hortaçsu and Erc R. Nelsen The Zethammer and Adams paper does an excellent job of documentng patterns n ebay bddng data, but some of ther statstcal tests do not test the sealed-bd assumpton drectly. 994 Rejonder: Causes and Implcatons of Some Bdders Not Conformng to the Sealed-Bd Abstracton Robert Zethammer and Chrstopher Adams We present a rejonder to the nvted comments on our lead dscusson paper. 998 Onlne Demand Under Lmted Consumer Search Jun B. Km, Paulo Albuquerque, and Bart J. Bronnenberg Jont estmaton of consumer nformaton search and onlne demand Estmatng Cannbalzaton Rates for Poneerng Innovatons Harald J. van Heerde, Shuba Srnvasan, and Marnk G. Dekmpe We present a method to determne how much of a radcal nnovaton s new demand s due to cannbalzng the frm s other products, rather than drawng from competton or generatng prmary demand (Contnues on page ) Vol. 29, No. 6, November December 2010, pp. ssn essn X Marketng Scence 2010 INFORMS

3 MARKETING SCIENCE The Economcs of Buyer Uncertanty: Advance Sellng vs. Probablstc Sellng Scott Fay and Jnhong Xe Why, when, and how a seller can mprove proft by offerng consumers an addtonal opton nvolvng buyer uncertanty: Homogenze heterogeneous consumers by advance sellng, or separate heterogeneous consumers by probablstc sellng Optmal Reverse-Prcng Mechansms Martn Spann, Robert Zethammer, and Gerald Häubl We analyze the optmal desgn for a proft-maxmzng reverse-prcng retaler Optmal Reverse Channel Structure for Consumer Product Returns Jeffrey D. Shulman, Anne T. Coughlan, and R. Canan Savaskan We examne optmal polces for managng consumer returns of nondefectve products n a manufacturer retaler channel Customer-Base Analyss n a Dscrete-Tme Noncontractual Settng Peter S. Fader, Bruce G. S. Harde, and Jen Shang A spreadsheet-based model for predctng future purchasng patterns n a dscrete-tme noncontractual settng The Seeds of Dssoluton: Dscrepancy and Incoherence n Buyer Suppler Exchange Qong Wang, Ujwal Kayande, and Sandy Jap Dscrepancy and ncoherence n nterorganzatonal exchange The Effects of Informaton Transparency on Supplers, Manufacturers, and Consumers n Onlne Markets Zach Zhzhong Zhou and Kevn Xaoguo Zhu We show that nformaton transparency can create value for the overall e-market; however, t creates a conflct of nterest among supplers and manufacturers Convertng Prates Wthout Cannbalzng Purchasers: The Impact of Dgtal Dstrbuton on Physcal Sales and Internet Pracy Brett Danaher, Samta Dhanasobhon, Mchael D. Smth, and Rahul Telang A natural experment shows that the use of dgtal dstrbuton channels can reduce pracy wthout mpactng sales of physcal products Search and Choce n Onlne Consumer Auctons Ernan Haruvy and Peter T. L. Popkowsk Leszczyc We dentfy factors nfluencng search and choce n a controlled feld experment nvolvng pars of smultaneous auctons Statement from the Edtor Regardng New Perspectves on Customer Death Usng a Generalzaton of the Pareto/NBD Model Steven M. Shugan 1165 Focus on Authors 1166

4 Vol. 29, No. 6, November December 2010, pp ssn essn X nforms do /mksc INFORMS The Effects of Informaton Transparency on Supplers, Manufacturers, and Consumers n Onlne Markets Zach Zhzhong Zhou, Kevn Xaoguo Zhu Rady School of Management, Unversty of Calforna, San Dego, San Dego, Calforna {zzhou@rady.ucsd.edu, kxzhu@ucsd.edu} Ths paper looks nto the effects of nformaton transparency on market partcpants n an onlne tradng envronment. We study these effects n busness-to-busness electronc markets wth frms competng n both upstream and downstream ndustres. The pror lterature generally assumes that ether the downstream frm (buyer) or the upstream frm (seller) s a monopoly. It s not clear whether nformaton transparency would stll create value f both buyers and sellers face olgopolstc competton, where the benefts of nformaton transparency could be competed away. To answer ths queston, we frst develop a smple two-echelon e-market model and then extend the model to more general settngs. We fnd that nformaton transparency can create value for the overall e-market, yet t affects buyers and sellers very dfferently: one sde wll be hurt, dependng on the competton mode (Cournot or Bertrand) n the downstream. Ths suggests that a manufacturer-owned, a suppler-owned, and a neutral e-market wll have dfferent preferences for nformaton transparency. Fnally, we fnd that nformaton transparency can hurt consumers when the downstream ndustry engages n Bertrand competton. Ths s a surprsng result gven the expectaton that onlne markets create substantal value for consumers. Key words: electronc markets; competton; uncertanty; market mcrostructure; nformaton transparency; B2B marketng; game theory; analytcal modelng Hstory: Receved: March 24, 2009; accepted: Aprl 26, 2010; processed by Greg Shaffer. Publshed onlne n Artcles n Advance July 29, 2010, and updated August 3, Introducton After the burst of the dot-com bubble n 2000, many electronc markets went out of busness, yet many survvng markets, whch bult brand awareness and market share, kept growng and evolvng. Albaba, the largest busness-to-busness (B2B) onlne e-market n the world, has wtnessed a revenue growth of 58% from 1,364 mllon yuan n 2006 to 2,163 mllon yuan n Its gross proft ncreased by 67% n 2007, and ts operatng proft ncreased by nearly 200%. The number of regstered buyers and sellers of ts onlne tradng platform grew to 28 mllon (as of December 31, 2007), representng a 40% annual growth n user base. 1 In the Unted States, onlne transactons were stll small as a percentage of total retal sales ($31,708 mllon, about 3.5% of total retal sales n the frst quarter of 2009), but they kept ncreasng steadly. 2 It was estmated that more than 94% of total onlne transactons were B2B tradng. 3 The ups and downs of B2B e-markets motvate us to examne how a B2B market 1 See Albaba (2008). 2 See U.S. Census Bureau (2009). 3 See U.S. Census Bureau. creates value for market partcpants. In ths paper, we focus on an mportant feature of B2B: nformaton transparency, whch enables frms to share nformaton onlne. Informaton sharng has been shown to beneft tradng partners. In realty, many ndustres are stll n search of a platform that wll facltate nformaton sharng whle allowng frms to conduct transactons. B2B electronc markets (e-markets) have the promse of beng one such transacton platform. B2B e-markets provde a dgtal envronment wth abundant data about products, prces, bds, quanttes, and other transacton detals. Hence, relatve to tradtonal physcal markets, e-markets offer a data-rch envronment. Thus, nformaton transparency, whch s defned as the degree of vsblty and accessblty of nformaton, s a key feature of B2B e-markets (Zhu 2004). Earler studes show that nformaton transparency benefts total supply chan (e.g., Lee et al. 2000, Cachon and Fsher 2000), but the nformaton transparency n these studes generally refers to vertcal nformaton sharng about demand between an upstream frm (e.g., a suppler) and a downstream frm (e.g., a manufacturer). Ths s dfferent from horzontal nformaton transparency between compettors. Evdence shows that horzontal nformaton 1125

5 Zhou and Zhu: The Effects of Informaton Transparency 1126 Marketng Scence 29(6), pp , 2010 INFORMS transparency n electronc markets enables frms to use transacton data to nfer the cost structure of compettors (Soh et al. 2006). Ths new feature s partly enabled by the data-rch envronment of onlne markets (relatve to tradtonal markets). Informaton transparency s deemed socally desrable because t may help mprove effcency n resource allocaton (Bakos 1997). On the other hand, market partcpants may want to conceal transacton data to protect ther prvacy (Kalvenes and Basu 2006). Pror economcs lterature has analyzed the effects of nformaton sharng n a one-level market (e.g., Gal-Or 1985); however, t s not clear whether nformaton transparency about compettors cost would beneft a two-level e-market wth olgopolstc competton exstng n both upstream and downstream ndustres. In ths paper, we focus on the followng research questons: In such a market, wll nformaton transparency beneft both sellers and buyers, or wll there be a conflct of nterest? If such conflct of nterest exsts, under what condtons would buyers (or sellers) be hurt? How does nformaton transparency affect consumers? The real world offers examples on both sdes: B2B e-markets wth hgh nformaton transparency and wth low nformaton transparency. Before 2000, auto manufacturers each had ther own prvate exchanges n whch ther prequalfed supplers could do transactons wth the dedcated auto manufacturer. That s, each of the bg three auto manufacturers ran ther own separate marketng channels. 4 In 2000, Covsnt was created to provde a transparent shared platform on whch bddng prces were vsble to all partcpants, yet market partcpants were concerned about ther prvacy. Arba, another B2B e-market, adopted a busness model wth lower nformaton transparency than that of Covsnt. WorldWde Retal Exchange (WWRE), another e-market, has two e-market structures wth dfferent levels of nformaton transparency. Frst, WWRE s data pool servce provdes up-to-date and searchable nformaton, wth an objectve to develop a sngle platform that connects retalers, manufacturers and ther busness tradng partners to more effcently and effectvely share nformaton and manage work processes (Logstcs Today 2005, emphass our own). Second, WWRE also provdes prvate e-markets to those frms who want to customze ther nformaton exchange wth selected supplers, thus achevng better control over transacton data. These real-world examples llustrate that nether the transparent e-market nor the opaque e-market s 4 Exostar has a smlar ndustry structure n the aerospace ndustry. an all-encompassng soluton n practce. 5 Ths can be related to multform ownershp structures of the B2B e-markets. Yoo et al. (2007) defned three ownershp structures: (1) buyer-owned (manufacturerowned) marketplaces where manufacturers jontly own the marketplace, (2) seller-owned (supplerowned) marketplaces, and (3) neutral marketplaces that are owned by ndependent thrd partes. The ownershp structure could affect the choce of transparency level of a B2B e-market. Intutvely, f the nformaton transparency benefts manufacturers, then a manufacturer-owned marketplace would prefer a transparent market structure. The queston s ths: under what condtons wll the nformaton transparency be benefcal to a specfc type of B2B e-market? The answer to such a queston may generate useful nsghts about the role of nformaton transparency n onlne markets and on the mcrostructure desgn of onlne markets. Ths n turn may be useful n understandng whch structure worked and whch structure faled. To better understand these ssues, we develop a two-level B2B e-market model. Buyers (manufacturers) n the downstream each have some prequalfed supplers n the upstream. Supplers compete for the manufacturer s orders va bddng on the e-market platform; manufacturers n turn compete n the consumer market. Usng ths settng, we show that the nformaton transparency affects manufacturers and supplers very dfferently. We fnd that one sde (ether manufacturers or supplers) s hurt by, whereas the other sde benefts from, the nformaton transparency enabled by the e-market. Interestngly, the competton mode of the downstream ndustry turns out to be a crtcal factor that determnes whch sde s hurt. If manufacturers compete on quantty (.e., Cournot competton), the nformaton transparency helps them but hurts ther upstream supplers. That s, a manufacturer-owned B2B e-market may prefer a transparent e-market structure, whereas a suppler-owned B2B e-market may prefer an opaque market. Conversely, f manufacturers compete on prce (.e., Bertrand competton), they are hurt whle supplers beneft. These results show a conflct of nterest regardng nformaton transparency between manufacturers and supplers. Despte the conflct of nterest, we fnd that nformaton transparency always ncreases the overall welfare to all e-market partcpants regardless of the competton mode, mplyng that ts beneft always domnates 5 Defned more precsely n the next secton, a transparent e-market refers to an nformaton structure n whch a manufacturer s able to see the bds (prces) to other manufacturers n the onlne market, whereas an opaque e-market refers to an nformaton structure n whch a manufacturer s unable to see the bds to other manufacturers.

6 Zhou and Zhu: The Effects of Informaton Transparency Marketng Scence 29(6), pp , 2010 INFORMS 1127 the loss. Ths suggests that a neutral B2B e-market may prefer a transparent e-market model. We further examne the effect of nformaton transparency on consumers. We fnd that the nformaton transparency can hurt consumers under certan condtons. Ths s a surprsng result gven the expectaton that onlne markets could create substantal values to consumers (Htt and Brynjolfsson 1996) Related Lterature Our paper s related to the marketng lterature on nformaton economcs n a dstrbuton channel. Vertcal nformaton sharng was found to have two effects on an upstream manufacturer: (1) an effcency effect, whch helps the manufacturer to better manage ts nventory; and (2) a strategc effect, whch can hurt t by lmtng ts ablty to extract profts from a downstream retaler (Iyer et al. 2007). In examnng nformaton acquston and sharng n a dstrbuton channel, t was shown that nformaton acquston benefts a downstream retaler, whereas vertcal nformaton sharng hurts the retaler but benefts an upstream wholesaler (Guo 2009). He et al. (2008) consder vertcal nformaton sharng n a channel settng where demand s hghly volatle and frms engage n short-term tradng relatonshps. Informaton asymmetry about demand can also be dealt wth by usng advertsng and slottng allowances (Desa 2000, Chu 1992). The lterature of operatons management also examned the vertcal nformaton sharng n varous settngs (see, for example, Lee et al. 1997, 2000; Gavrnen et al. 1999; Cachon and Fsher 2000; Kulp et al. 2004). Most of ths pror lterature focuses on vertcal nformaton sharng and consders the case where there s one frm n an upstream ndustry or n a downstream ndustry. Our paper dffers from the pror lterature n that we consder the case where competton exsts n both the upstream and the downstream ndustres, and nformaton s transferred horzontally between compettors va a market mechansm. There s a stream of economcs lterature that focuses on horzontal nformaton sharng among compettors n a one-level market, where sourcng from upstream s not explctly modeled (Vves 2002, Rath 1996, Shapro 1986, Gal-Or 1985). Zhu (2004) examnes the ncentves for frms to jon a transparent e-market. Our paper dffers from ths lterature n that we model a twolevel e-market, where both the upstream ndustry and downstream ndustry are explctly modeled. Thus, our paper flls a gap n the lterature and provdes new busness nsght regardng the effects of nformaton transparency on the upstream ndustry, the downstream ndustry, and the total e-market, respectvely. Our paper s also related to the marketng lterature on vertcal channel coordnaton (see, for example, Gerstner and Hess 1995, Iyer 1998, Coughlan 1985, Shaffer and Zettelmeyer 2004, Jeuland and Shugan 1983). In ths paper, nformaton transparency n the e-market can help downstream buyers to coordnate ther strateges when the downstream ndustry engages n Cournot competton. The coordnaton occurs between compettors nstead of between busness partners. In our model, ths s done by usng suppler cost nformaton to acheve better outcomes n the fnal consumer market. To llustrate the major result wth mathematcal smplcty, we present a smple base model, followed by an analyss of the overall effects on the total e-market and dfferental effects on supplers and manufacturers, respectvely. Then, we relax some of the assumptons and extend the base model to examne more general stuatons, ncorporatng (1) dfferent competton modes (Cournot versus Bertrand), (2) overlappng supplers, and (3) asymmetrc procurement channels. We show that the major results n the base model also hold n more general settngs. Most of the techncal proofs are provded n the electronc companon, avalable as part of the onlne verson that can be found at 2. The Base Model To llustrate the essence of the ssue, we consder a smple two-level e-market wth two manufacturers (M 1 and M 2 ) n the downstream ndustry. Each manufacturer has two prequalfed upstream supplers, where M s supplers are labeled as S a and S b = 1 2, as shown n Fgure 1. Bult on related lterature (Bakos and Brynjolfsson 1993, Pnker et al. 2003), we make several assumptons to model such a market. Assumpton 1. A manufacturer procures from a lmted number of prequalfed supplers. Fgure 1 S 1a The Base Model B2B E-market Bddng (A) M 1 S 1b S 2a Consumers Bddng (B) M 2 S 2b Supplers Manufacturers

7 Zhou and Zhu: The Effects of Informaton Transparency 1128 Marketng Scence 29(6), pp , 2010 INFORMS Ths settng captures some key features of B2B e-markets that are dfferent from those of busnessto-consumer (B2C) e-markets and s motvated by several real-world exchanges, such as Exostar and Covsnt. 6 Frst, each manufacturer does busness wth a lmted number of supplers because busness relaton-specfc nvestments n B2B e-markets are sgnfcantly hgher than those n B2C e-markets. Bakos and Brynjolfsson (1993) argue that manufacturers often fnd t optmal to work wth only a small number of supplers. Second, transactons n B2B e-markets often nvolve mutual trust, ntegratng nterorganzatonal nformaton systems, qualty requrements, product specfcaton, and arrangements of shpments and payments. Before a manufacturer nvtes supplers to bd on a contract, the manufacturer generally needs to prequalfy supplers who meet ts requrements (Pnker et al. 2003). In a B2B e-market, t s often dffcult or mpractcal to swtch to a nonprequalfed suppler n a short perod of tme. 7 These fundamental ndustry relatonshps reman mportant, even wth the presence of an electronc market. We can thnk of the suppler selecton problem as a two-stage process: frst, manufacturers prequalfy supplers based on nonprce attrbutes (whch we take as gven n ths model); second, prequalfed supplers bd for the manufacturers busness. For mathematcal smplcty, we assume that the prequalfed supplers of one manufacturer are dfferent from those of the other manufacturer (.e., manufacturers have dfferent upstream supplers). In 6, we wll relax ths assumpton and allow overlappng supplers (.e., some supplers can contract wth both manufacturers). Assumpton 2. Upstream supplers margnal costs are prvate nformaton and ndependently follow a unform dstrbuton U 0 1. The cost structure of manufacturers conssts of procurement cost and other costs. To smplfy exposton, we assume that the sum of all other costs for each manufacturer remans a constant and s further normalzed to zero. 6 Examples of real-world B2B e-markets that partly resemble ths feature (and the structure n Fgure 1) nclude Covsnt n the auto ndustry, Exostar n aerospace ndustry, and the Global Healthcare Exchange n health-care ndustry. They have a small number of downstream frms to do busness wth some prequalfed upstream frms. 7 For example, evdence shows that t s useful for auto manufacturers to procure from prequalfed supplers who get nvolved n collaboratve new product development (Zrpol and Caputo 2002). Prce s not the only consderaton when choosng supplers. A manufacturer could procure car components from a dedcated suppler who offers a hgher prce than other nonprequalfed supplers. Supplers compete for contracts va a Vckrey second-bd aucton. We make ths assumpton for two reasons. Frst, Englsh aucton s currently the domnant mechansm on the Internet (Pnker et al. 2003). Second, the outcome of the Englsh aucton can be acheved by the Vckrey aucton, and t s customary to model an Englsh aucton as a Vckrey aucton (Mlgrom 1989). Regardng the nformaton structure, there are two possble nformatonal schemes: transparent and opaque. 8 Frst, f the e-market s run as a transparent platform (.e., bddng prces are revealed), supplers bds are vsble to both manufacturers (see Fgure 1), whch means that both manufacturers can observe each other s procurement cost. Second, f the e-market s run as an opaque platform, supplers bds are vsble only to the correspondng manufacturer, not to ts compettor. That s, there are two separate auctons (smlar to those prvate exchanges dscussed n 1). In contrast to the transparent market, each manufacturer s procurement cost remans as prvate nformaton. The followng assumpton summarzes the dfference between the two nformaton structures. Assumpton 3. The transparent market enables manufacturers to share ther cost nformaton. Assumpton 4. A manufacturer-owned (or supplerowned) B2B e-market seeks to maxmze expected gans of manufacturers (or supplers), whereas a neutral B2B e-market seeks to maxmze the total expected gan of supplers and manufacturers. Gven the nformaton structures defned above, the sequence of events s as follows. Prequalfed upstream supplers compete for downstream orders va bddng. After the bddng s closed, both manufacturers collect necessary nformaton from the B2B e-market and then make decsons on ther procurement quanttes. After recevng purchased nputs from upstream supplers, both manufacturers assemble fnal products and sell to consumers. Manufacturers are engaged n Cournot competton wth an nverse demand functon from the consumer market, p m1 = d q m1 q m2 p m2 = d q m2 q m1 where q m s the quantty sold by manufacturer ( = 1 2), p m s the prce set by manufacturer ( = 1 2), and d s the demand ntercept. We further assume that 0 < <1, whch means that the mpact of a unt change of q m on p m s greater than that 8 Gven that we focus on comparng these two e-market structures, we do not consder the case that frms may trade off-lne.

8 Zhou and Zhu: The Effects of Informaton Transparency Marketng Scence 29(6), pp , 2010 INFORMS 1129 of q mj on p m (that s, p m / q m > p m / q mj, where j). To avod degenerate solutons, we follow pror lterature by assumng that the demand ntercept s suffcently large. Also, all frms are rsk neutral. The notaton used n ths paper s gven n the appendx. 3. The Effects of Informaton Transparency Based on the above model setup, we study the effects of nformaton transparency on the manufacturers, the supplers, and the total e-market, respectvely. Denote the cost to manufacturer by c m ( = 1 2), whch s the best prce that t can get from ts prequalfed suppler. Let the lowest cost of ts upstream supplers be s l1 and the second-lowest cost be s l2. The strategc varable for a suppler s ts bddng prce. In a Vckrey aucton wth endogenous quantty, a suppler s optmal bddng wll reveal ts true margnal cost, an equlbrum result establshed n standard aucton theory (Hansen 1988, Mlgrom 1989). 9 Thus, c m = s l2 = 1 2, manufacturer s cost s equvalent to the second-lowest cost of ts prequalfed supplers. Accordng to the nformaton structure of the e-market, c m s revealed to manufacturer j (j = 1 2 j ) n a transparent e-market but remans prvate n an opaque e-market. Frst, we consder the transparent e-market. After c mj s revealed to manufacturer, ts problem s max q m T m = d q m q mj c m q m = 1 2 j where m T, c m, and q m are manufacturer s proft, cost, and quantty, respectvely. As dscussed above, c mj s observable to manufacturer through the e-market platform. Thus, manufacturer may use c mj to compute q mj, ndcatng that q mj s known to by computaton. Solvng the two manufacturers problems, we get the followng results (see the appendx for detals): p T m = 1 4 d c m + c mj q T m = 1 4 d 2 2c 2 m + c mj where the superscrpt T stands for a transparent market. It follows E m T = 1 [ ] d 3d (1) 6d E s T = Here, we borrow a result from establshed lterature n whch the bdders decson problem has been analyzed va game-theoretc models. Although we do not repeat the analyss, supplers are stll strategc. where E m T s the expected proft of manufacturer n the transparent B2B e-market, and E s T s the expected proft of manufacturer s suppler who wns the aucton. By symmetry, E T, the total expected proft of all partcpants, s E T = 2E T m +2E T s = 2d 3d (2) Now, consderng the opaque e-market, we get the followng results (see the appendx for detals): p O m 3d 2 = c m + c mj [ 2d c m q O m = E O m = ( d 2 ) E s O = 1 24d E O = 2E O m + 2 3d 2 3d + 2E O s = (4) Comparng Equaton (1) wth Equaton (3) and Equaton (2) wth Equaton (4), we obtan the followng result: ] E T m E O m = / >0 E T s E O s = 2 / < 0 E T E O = 2 2 / >0 Ths shows that manufacturers wll beneft from, and supplers wll be hurt by, nformaton transparency. The overall effect s stll postve. Proposton 1. When the downstream ndustry engages n Cournot competton, a manufacturer-owned and a neutral B2B e-market prefer a transparent e-market model, whereas a suppler-owned B2B e-market prefers an opaque e-market model. The pror lterature has shown that vertcal nformaton sharng about demand creates value to a supply chan (e.g., Lee et al. 2000). Here, we obtan a consstent result but n an expanded settng where the nformaton transparency s about cost rather than demand, and there are competng frms n both upstream and downstream none s a monopoly. Thus, our result, based on a B2B e-market that makes ths feasble, brngs addtonal nsghts nto the value of nformaton n a more realstc two-level e-market settng. (3)

9 Zhou and Zhu: The Effects of Informaton Transparency 1130 Marketng Scence 29(6), pp , 2010 INFORMS It s easy to verfy that E m b =E qb m 2 = E qm b 2 +var qm b, where b = T or O. Further, E q T m1 = 3d 2 E qo m1 = Then E m T E O m = var qt m var qo m. When the downstream frm s decson varable s quantty (that s, Cournot competton n the downstream ndustry), a transparent B2B e-market makes the quantty more responsve to market condtons and thus makes t more volatle compared wth that n an opaque B2B e-market. Thus, we have var qm1 T > var qm1 O, whch leads to E T m >E O m. The ntuton s that a transparent market helps manufacturers coordnate ther quantty strateges, leadng to more effcent producton and thus greater expected profts for both. It can be shown that E s b = E qb m sl2 s l1 where b = T or O. Further, cov q b m sl2 E [ q T m sl2 s l1 ] = E [ q O m sl2 s l1 ] s l1 + Then E s T E O s = cov qt m sl2 s l1 cov qm O s l2 s l1. Consder a suppler (say, S 1a ) who wns the bd. Suppler S 1a hopes that q m1 and s l2 have 1 sl1 1 a more postve correlaton. That s, when S 1a s proft margn s1 l2 sl1 1 s large, q m1 s also large. However, s1 l2 sl1 1 n a transparent e-market tends to be more negatvely assocated wth q m1 than n an opaque market. Ths can be llustrated by cov q T m1 sl2 1 sl1 1 = 1/ <cov q O m1 sl2 1 sl1 1 = 1/72 It means that a hgh-cost manufacturer s less lkely to ncorrectly order a large quantty n a transparent e-market than n an opaque market, but such a mstake s desrable to supplers. In ths sense, nformaton transparency works aganst supplers. Proposton 1 has mportant manageral mplcatons to e-market operators. The frst busness mplcaton s that the ownershp structure of an e-market affects the choce between transparency and opaqueness. Second, regardng the nformaton transparency, a conflct of nterest between supplers and manufacturers exsts n a settng where both sdes engage n competton, whereas the pror lterature generally does not consder the competton wthn both levels. 4. Bertrand Competton n Downstream Industry The above analyss assumes that manufacturers compete on quantty. In ths secton, we consder Bertrand competton where manufacturers compete on prce. Manufacturer s demand functon s q m = d p m + p mj = 1 2 j where p m and p mj are prces charged by manufacturers and j, respectvely. Agan, 0 < <1, whch means that the mpact of M s prce change on M s demand s greater than the mpact of M j s prce change (that s, q m / p m > q m / p mj ). Usng a smlar process as that n the prevous secton, we derve the followng results. In a transparent e-market, p T m = 1 4 d c 2 m + c mj q T m = 1 4 d c m + c mj E T m = d2 8d (5) E T s = d (6) E T = 2E T m + 2E T s = 2d2 2d (7) In an opaque e-market, p O 3d + m = c m q O 3d 1 m = c m c mj E O m = d2 4d (8) E O s = d 3 2 E O = 2E O m + 2E O s (9) d + 3d = (10) These equatons represent the expected profts for the manufacturers, the supplers, and the total e-market under transparent and opaque markets, respectvely. Comparng Equaton (5) wth Equaton (8), Equaton (6) wth Equaton (9), and Equaton (7) wth Equaton (10), we obtan the followng result: E T m E O m = / <0 E T s E O s = 2 / >0 E T E O = 4 / >0 It shows that nformaton transparency hurts manufacturers but benefts supplers and the whole e-market.

10 Zhou and Zhu: The Effects of Informaton Transparency Marketng Scence 29(6), pp , 2010 INFORMS 1131 Table 1 Impact of Informaton Transparency on Prce, Quantty, and Proft c m1 = c + c m2 = c c m1 = c c m2 = c p p m1 p m2 p m1 p m2 m1 m2 m1 m2 Proposton 2. When the downstream ndustry engages n Bertrand competton, a suppler-owned and a neutral B2B e-market prefer a transparent e-market model, whereas a manufacturer-owned B2B e-market prefers an opaque e-market model. Recall that nformaton transparency benefts downstream manufacturers when they compete on quantty, but here t turns to be aganst them under Bertrand competton. Followng a smlar analyss as that for the Cournot competton, we can show that E m T E m O = var qt m var qo m. Agan, a transparent e-market makes the decson varable, whch s prce n Bertrand competton, more responsve to market condtons. However, prce absorbs most of the market uncertantes, leadng to a reducton of the varance of quantty and thus a reducton of the expected profts of manufacturers. Another way of llustratng the ntuton s showng how prces and profts are affected by the nformaton transparency under dfferent scenaros. In Table 1, we fx M 2 s cost to be the expected cost c and let M 1 s cost be slghtly hgher (or lower) than c. Table 1 shows that when M 1 s cost s slghtly hgher than c, then the nformaton transparency ncreases M 1 s prce and proft. Ths s because when M 2 realzes that M 1 s a less compettve frm than expected (c m1 > c), M 2 ncreases ts prce (p m2 ). Consequently, M 1 faces a softened prce competton and thus s able to ncrease ts prce as well. In ths case, the nformaton transparency helps M 1. However, when M 1 s cost s a lttle bt lower than c, then the nformaton transparency works aganst M 1. The reason s that M 2 reduces ts prce when t realzes that t faces a more compettve frm than expected (c m1 < c). Such reacton causes M 1 to reduce ts prce as well, resultng n an ntensfed prce competton, whch hurts both manufacturers. It can be verfed that M 1 s gan from the frst case s less than ts loss from the second case: m1 c m1 = c+ c m2 = c + m1 c m1 = c c m2 = c <0 Thus, the nformaton transparency reduces a manufacturer s expected proft. Followng a smlar analyss as that for the Cournot competton, we fnd that a wnnng suppler (say, S 1a ) hopes that q m1 and s l2 have a 1 sl1 1 more postve correlaton, and t can be shown that cov qm1 T sl2 1 sl1 1 >cov qo m1 sl2 1 sl1 1. That s, when 1 sl1 1 S 1a s proft margn s1 l2 sl1 1 s large, q m1 n a transparent e-market tends to be larger than that n an opaque e-market. The ntuton s that a transparent e-market enables a manufacturer to adjust ts prce accordng to ts compettors cost. In Bertrand competton, both manufacturers can rase ther prces wthout losng too much demand, especally when s close to 1 (notng that the demand of M 1 s q 1 = d p 1 + p 2 ). Ths suggests that when s l2 s large n a transparent e-market, qm1 T stll can be large as a result of prce adjustments by manufacturers. Thus, a transparent e-market benefts supplers Conflct of Interest Regardng Informaton Transparency As a quck summary of the analyss so far, we have found that the effect of nformaton transparency on the upstream s always opposte to the effect on the downstream. Table 2 summarzes these effects. It means that nformaton transparency can beneft one sde but at the cost of the other sde, ndcatng an nherent conflct of nterest regardng nformaton transparency. The competton mode n the downstream ndustry determnes whch sde wll be hurt. We have shown that a neutral e-market prefers a transparent e-market model. However, f manufacturers or supplers have an alternatve choce to establsh an opaque e-market by themselves, then the operator of a neutral e-market could lose ts customers. For example, when the downstream s Cournot competton, manufacturers could establsh an opaque manufacturer-owned e-market when these manufacturers have more market power than supplers. The conflct of nterest between buyers and sellers n such an e-market has been conceptually addressed n the pror lterature (e.g., Saramesh et al. 2002). Ths paper uses an analytcal model to llustrate such conflct of nterest regardng nformaton transparency n a neutral e-market. Ths result offers an mportant manageral nsght to a neutral e-market operator. It suggests that the operator may need to reallocate the nformatonal benefts between buyers and sellers (e.g., chargng one sde whle compensatng the other sde) so that both sdes have no ncentves to establsh ther own prvate e-markets. Table 2 The Effects of Informaton Transparency n B2B E-market Downstream competton Manufacturers Supplers Overall effect Cournot + + Bertrand + +

11 Zhou and Zhu: The Effects of Informaton Transparency 1132 Marketng Scence 29(6), pp , 2010 INFORMS 5. The Effects on Consumers Our above analyss focuses on the nformatonal effects on busness partcpants. Now we consder the broader effects on consumers (the lowest ter n Fgure 1). If the downstream ndustry engages n Cournot competton, the consumer surplus (CS) can be expressed as CS = [ 2 q ] d q q 3 dq d q q 3 q =1 0 = 1 2 q2 m1 + q2 m2 If the e-market s transparent, then CS T = 1 2 qt m1 2 + q T m2 2. If the e-market s opaque, then CS O = 1 2 qo m1 2 + q O m2 2. Usng the results establshed earler, t can be shown that E CS T E CS O = / >0 meanng that consumer surplus n the transparent e-market s hgher than that n the opaque e-market. The ntuton s as follows: E CS T E CS O = E qm1 T 2 E qm1 O 2 by symmetry. It can be shown that E qm1 T = E qo m1 = 3d 2 / Then E CST E CS O = E qm1 T 2 + var qm1 T E qo m1 2 var qm1 O = var qm1 T var qo m1. Ths shows that E CST >E CS O because var qm1 T >var qo m1. As dscussed earler, when downstream frms engage n Cournot competton, ther quanttes are more responsve to market condtons than those n an opaque e-market. Thus, we have var qm1 T >var qo m1 and E CST >E CS O. Ths shows that a hgher varance of quantty makes consumers better off. As shown n Table 2, the nformaton transparency benefts the e-market as a whole. It follows that the nformaton transparency ncreases the socal welfare (SW) when the downstream competton s Cournot competton. That s, E SW T >E SW O where SW T = T + CS T and SW O = O + CS O. Now, consder the Bertrand competton n the downstream ndustry. We follow a smlar dervaton process to arrve at E CS T E CS O = / <0 E SW T E SW O = / <0 We fnd that E CS T <E CS O because var qm1 T < var qm1 O. As dscussed earler, when downstream frms engage n Bertrand competton, a transparent e-market ncreases the varance of the decson Table 3 The Effects of Informaton Transparency Downstream competton Consumers E-market Socal welfare Cournot Bertrand + varable (that s, prce). However, t reduces the varance of quantty because the decson varable has absorbed most of the market uncertantes. Ths explans var qm1 T <var qo m1 n Bertrand competton, and ths hurts consumers. Proposton 3. When the downstream ndustry engages n Cournot competton, nformaton transparency benefts end consumers and ncreases the total socal welfare. When the downstream ndustry engages n Bertrand competton, nformaton transparency hurts end consumers and reduces the total socal welfare. Interestngly, when the downstream ndustry engages n Cournot competton, there s no conflct of nterest between consumers and upstream frms. However, when the downstream ndustry engages n Bertrand competton, a conflct of nterest between end consumers and upstream frms arses. Ths s summarzed n Table 3. The fndng that when the downstream competton s Bertrand-type, nformaton transparency hurts consumers s a rather surprsng, and perhaps unntended, consequence of electronc markets. The common belef about the Internet-enabled e-markets has been that they are largely postve for consumers (Bakos 1997, Htt and Brynjolfsson 1996). Our results ndcate that ths s not always the case. 6. Extensons Our results thus far were obtaned under certan assumptons, and we realze that some of them may seem restrctve. In ths secton, we attempt to relax some of the assumptons and extend the base model n several dmensons. We wll see that the smple base model s n fact able to demonstrate the major result, whereas the extended model confrms ts robustness Overlappng Supplers n Upstream Channel The base model assumes that each downstream manufacturer has ts own dedcated suppler base n the upstream. Now we relax ths assumpton by allowng manufacturers to have common supplers;.e., a suppler may trade wth both manufacturers, who n turn compete on quantty n the consumer market. Thus, t becomes possble that both manufacturers may procure from the same suppler (as llustrated n Fgure 2). In fact, ths s becomng ncreasngly common as the outsourcng trend contnues.

12 Zhou and Zhu: The Effects of Informaton Transparency Marketng Scence 29(6), pp , 2010 INFORMS 1133 Fgure 2 Expanded Model wth Overlappng Upstream Supplers k supplers Bddng (A) c m1 k s Common supplers k supplers c m2 M 1 M 2 q m1 q m2 Consumers p m = d q m q mj Bddng (B) We assume that each manufacturer has k prequalfed supplers, among whch k s supplers are commonly shared by both manufacturers (k k s 0, k 2, k k s N ). Sharng common supplers may have two effects on manufacturers. Frst, t ncreases the cost correlaton between manufacturers as they tend to get smlar prces from the upstream ndustry. That s, cov c m1 c m2 s no longer zero. Second, nformaton spllover may arse even n an opaque e-market when k s 1. Ths s because M may observe the bddng prces of common supplers. Ths nformaton may be used to nfer M j s cost, even n an opaque market structure. These two effects ntroduce new complextes. Albet a tedous process, t can be shown that m = E T m E O m 0 s = E T s E O s 0 = E T E O 0 Ths s consstent wth what we have establshed n Proposton 1. Moreover, m k s + 1 m k s <0 s k s + 1 s k s >0 k s + 1 k s <0 Ths establshes the followng result. Proposton 4. If upstream supplers are allowed to trade wth both manufacturers who engage n Cournot competton, the value of nformaton transparency to the total e-market ( ) and to a manufacturer ( m ) and a suppler s loss caused by nformaton transparency ( s ) decrease as the number of overlappng supplers ncreases. Ths proposton shows that the benefts of nformaton transparency go down when the number of overlappng supplers goes up. The key reason s that nformaton spllover va overlappng supplers partly substtutes the value of nformaton transparency. To see why, suppose that both manufacturers share a completely overlappng set of supplers (k = k s ); then t no longer matters whether the B2B e-market s opaque or transparent because a manufacturer would know the compettor s cost n both types of nformaton structures. In ths extreme case, the nformatonal value of the transparent e-market would be neutralzed. As shown n 3, nformaton transparency benefts the manufacturers and the total e-market. Ths secton shows that nformaton transparency can be acheved n two ways: (1) adoptng a transparent e-market structure, and (2) sharng common supplers. A natural queston then arses: Whch way would be more benefcal (a) to manufacturers, (b) to supplers, and (c) to consumers? The followng proposton provdes an answer. Proposton 5. Compared to adoptng a transparent e-market, sharng common supplers hurts manufacturers and end consumers, but t benefts supplers. It can be shown that E T m E O m k s = k E T s E O s k s = k whch ndcates that sharng common supplers s suboptmal to acheve nformaton transparency. Usng common supplers ncreases the nformaton transparency on the one hand, but t has an unntended consequence on the other hand: ncreasng manufacturer cost correlaton cov c m c mj. The frst effect benefts manufacturers and the second hurts them because manufacturers would be more lkely to have the same cost (or less dfferentated), whch may ntensfy head-to-head competton between them. Proposton 5 suggests that the net effect s negatve to manufacturers. It also shows that upstream supplers can take advantage of the ntensfed competton between downstream manufacturers. Ths result warns managers to be mndful about the mechansm of nformaton transparency. The ncreasng relance on common contract supplers may have unntentonal consequences of nformaton spllover despte the growng trend of outsourcng. Last, but mportant to note, consumers are hurt by ths knd of nformaton transparency because sharng supplers reduces the varance of quantty (when both manufacturers have the same supplers, then ther quanttes are the same). Followng a smlar analyss as that shown n 5, we show that E CS T E CS O k s = k = var q T m1 var qo m1 k s = k = var q T m1 >0

13 Zhou and Zhu: The Effects of Informaton Transparency 1134 Marketng Scence 29(6), pp , 2010 INFORMS Thus, a reducton n quantty varance reduces consumer surplus Asymmetrc Upstream Channels The base model assumes that each of the two manufacturers has two prequalfed upstream supplers. Ths assumpton can be relaxed by allowng each manufacturer, M, to have an arbtrary number, k, of supplers, and wthout losng generalty, let k 2 k 1 2, k N. Manufacturers could have an asymmetrc number of prequalfed supplers. We derve the expected manufacturer proft and suppler proft as n the appendx. It follows that m = E T m E O m >0 s = E T s E O s <0 = E T E O >0 Ths s the same result as n Proposton 1. Hence, the result establshed earler wth the smple base model carres over to a settng when more supplers are nvolved. It can be shown that m1 m2 and s1 s2 Thus we have the followng result. Proposton 6. If manufacturers engage n Cournot competton and have dfferent numbers of upstream supplers, the manufacturer who has fewer supplers obtans more value from nformaton transparency than ts compettor ( m1 m2 ). The expected loss of that manufacturer s wnnng suppler s more than that of the other manufacturer s wnnng suppler ( s1 s2 ). As dscussed earler, nformaton transparency tends to help Cournot manufacturers coordnate ther quantty strateges. Because k 2 k 1 2, M 2 s more lkely to obtan a lower procurement prce than that obtaned by M 1 and thus s more compettve than M 1. Informaton transparency reduces M 1 s cost uncertanty n M 2 s eyes and makes M 2 less aggressve than otherwse n an opaque e-market. Ths s the source of nformatonal benefts to M 1. Gven the fact that M 2 s more compettve than M 1 n terms of cost advantage, a decrease n the agressveness of M 2 s certanly more valuable to M 1 than a decrease n the aggressveness of M 1 to M 2, all else beng equal. On the other hand, nformaton transparency makes supplers worse off because a hgh-cost manufacturer n a transparent e-market s less lkely to ncorrectly order a large quantty than n an opaque market. Note that M 1 s more lkely to be a hgher-cost manufacturer than M 2. Ths suggests that the negatve effect of nformaton transparency would have a stronger mpact on M 1 s wnnng suppler than on M 2 s wnnng suppler. 7. Dscusson and Conclusons Ths paper studes marketng channels and assocated nformaton transparency n an e-market where supplers compete for orders from downstream manufacturers n a B2B e-market and then manufacturers compete for consumers n a B2C market. Based on a model dfferent from the lterature, our study sheds lght on several mportant questons about the effects of nformaton transparency on market partcpants. Along the way, t makes several contrbutons to the lterature Major Fndngs and Contrbutons Frst, we fnd that the nformaton transparency enabled by onlne tradng benefts the overall marketng channel. Pror lterature has shown that nformaton sharng about demand benefts the total supply chan. In ths paper, our result s obtaned n an expanded settng n whch we take competton nto account (where the nformatonal benefts would have to be dvded among market partcpants). Also, nformaton transparency n ths paper refers to transparency about a compettor s cost rather than market demand. Thus ths paper takes another step further toward understandng the mportant but subtle effects of nformaton transparency n an onlne envronment. Second, although the nformaton transparency benefts the total marketng channel, the effect on one sde s always n conflct wth the other sde. The competton mode n the downstream e-market determnes whch sde s benefted (or hurt) by the nformaton transparency. Pror lterature has shown that the key dfference between Cournot and Bertrand competton crtcally depends on producton capacty (Kreps and Schenkman 1983, Haskel and Martn 1994). The Cournot model s approprate when frms are capacty constraned, whereas the Bertrand model fts the case where frms have the capacty to serve the market ganed. The auto ndustry n the Unted States can be consdered a Cournot ndustry. We fnd that when the downstream frms engage n Cournot competton, a manufacturer-owned B2B e-market prefers a transparent structure. Ths fndng seems to be consstent wth Covsnt, whch was a transparent B2B platform owned by the bg three auto manufacturers. In contrast, the retalng ndustry n the Unted States can be consdered a Bertrand ndustry. We fnd that when the downstream frms engage n Bertrand competton, then an opaque structure s preferred by downstream frms. Ths fndng seems to be consstent wth the fact that major U.S. retalers tend to use ther own prvate exchanges to source goods from ther supplers. It s commonly beleved n the post-bubble era that a lack of overall value creaton may kll a neutral

14 Zhou and Zhu: The Effects of Informaton Transparency Marketng Scence 29(6), pp , 2010 INFORMS 1135 B2B e-market. However, ths paper suggests nformaton transparency can actually create overall value for a neutral e-market s partcpants. However, ts market operator may need to reallocate nformatonal benefts between sellers and buyers so as to resolve ther conflct of nterest regardng nformaton transparency. A msmanagement of value reallocaton may also cause a problem. Our theoretcal model seems to be supported by emprcal evdence presented n Soh et al. (2006), whch shows that buyers and sellers have conflctng nterests regardng prce transparency. Fnally, we consder the effects on consumers and the total socal welfare. It was beleved that the Internet-enabled e-markets have been largely postve for consumers. We show that ths s not always the case. When the downstream frms engage n Bertrand competton, the consumers are worse off wth nformaton transparency. Another surprsng result s that nformaton transparency can reduce the total socal welfare under certan condtons (that s, when downstream competton s Bertrand-type). These fndngs suggest that a more transparent e-market s not necessarly socally desrable. Even when t s socally desrable, t may come at a cost to end consumers. More broadly, the results of ths paper can be appled to other settngs where the downstream frms source nputs from upstream supplers va open bddng and then sell the products to consumers. Also, there may be uncertanty about the costs of the procurement. The transacton platform s not necessarly a B2B e-market. It can be an electronc data ntegraton (EDI), a teleconference bddng system, or a quote va phone or fax, for example Future Research Ths paper leaves several ssues open for further research. Frst, our results are obtaned under several assumptons about costs, demand, and market structure. We have relaxed some of these assumptons (and the results seem robust). Other assumptons can also be relaxed. For example, one could use more general demand functons and cost dstrbuton and test f our results stll hold n more general settngs. Second, one could ntroduce uncertanty n demand functons (e.g., the ntercept d s not a constant) and then examne the effects of nformaton transparency. Thrd, our e-market model can be used to study not only nformaton transparency but also other nterestng ssues such as the consequences of the ncreased use of common contract supplers due to outsourcng. These questons are left for further analyss. We hope that the ntal results reported heren wll motvate more research n ths area. 8. Electronc Companon An electronc companon to ths paper s avalable as part of the onlne verson that can be found at mktsc.pubs.nforms.org/. Acknowledgments The authors are lsted alphabetcally. The authors are grateful to the senor edtor, the area edtor, and two anonymous revewers for ther valuable comments and suggestons durng the revson of ths paper. The authors acknowledge the feedback from semnar presentatons at Stanford Unversty and the Unversty of Calforna, San Dego, as well as conference partcpants of Internatonal Conference on Informaton Systems 2007 and the INFORMS Annual Conference The second author acknowledges the fnancal support of the CAREER Award from the U.S. Natonal Scence Foundaton (Grant ) and the fnancal support from the Natonal Natural Scence Foundaton of Chna (Grant ). Appendx Notaton d Demand ntercept n demand functon c m Margnal cost of manufacturer, also the best prce offered by ts prequalfed supplers m Proft of manufacturer s Proft of manufacturer s suppler who wns the aucton q m Quantty of manufacturer ordered from supplers p m Prce of manufacturer charged to end consumers s l1 The lowest margnal cost of manufacturer s prequalfed supplers s l2 The second-lowest margnal cost of manufacturer s prequalfed supplers M Manufacturer S a, S b Manufacturer s prequalfed supplers T A supperscrpt denotng a transparent B2B e-market O A supperscrpt denotng an opaque B2B e-market The total proft of all partcpants n B2B e-market k The number of manufacturer s prequalfed supplers (see 6.2) k s The number of shared common supplers (see 6.1) k The number of manufacturer s prequalfed supplers (see 6.1) CS Consumer surplus of end consumers SW Socal welfare Cournot Competton (Proposton 1) Transparent E-market. Manufacturer s problem s max T q m = d q m q mj c m q m = 1 2 j m Solvng the frst-order condton and notng that the secondorder condton s satsfed, we have q T m = d 2 2c m + c mj = 1 2 j (11) 4 2 where the superscrpt T stands for transparent market. We wll substtute ths back to the proft functon to get