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We study the problem of a two-firm supply chain in which firms simultaneously choose a capacity before demand is realized. We focus on the role that private information about demand has on firms' ability to align their capacity decisions. When forecasts are private information, there are at most two equilibria: a complete coordination failure or a monotone equilibrium. The former equilibrium always exists, whereas the latter exists only when the marginal cost of capacity is sufficiently low. We also show that both truthful information sharing and preplay communication have an equilibrium with higher profits. We then test the model's predictions experimentally. Contrary to our theoretical predictions, we show that private demand forecasts do not have a consistently negative effect on firm profits, though capacities are more misaligned. We show that preplay communication may be more effective at increasing profits than truthful information sharing. Finally, we document that “honesty is the best policy” when communicating private information.

Decentralized supply chains are traditionally order focused: stage managers focus on meeting replenishment orders of downstream stages; market demand information is relayed up through these orders, and therefore is subject to costly delay and distortion. This paper shows that sharing real-time sales data across all stages and a change in focus to meeting customer demand can mitigate performance impairment caused by the order focus. We show that a change of managerial focus in a decentralized chain can be made by measuring stages’ performance based on their respective echelon stocks, which only depends on how well they respond to the market demand. A demand-focused measurement scheme can be made incentive compatible with the knowledge of the demand distribution; a heuristic scheme independent of the demand distribution can be used to achieve near incentive compatibility.