This paper introduces a new motivation for information sharing in decentralized supply chains–as a mechanism to achieve truthful information sharing and to reduce signaling costs. We study a two‐echelon supply chain with one manufacturer selling a homogenous product to n price‐setting competing retailers. Each retailer has access to private information about the potential market demand, and the retailers have an ex‐ante incentive to share this information with each other and to conceal the information from the manufacturer. However, without a mechanism that induces the retailers to truthful information exchange as their strategic choice, no information can be exchanged via pure communication (cheap talk). To overcome this obstacle, two signaling games are analyzed: in the first game, information is shared truthfully among the retailers; in the second game, information is also shared truthfully with the manufacturer. We show that under some conditions sharing information with the manufacturer results in a higher profit for the retailers.
