Equilibrium analysis of capacity allocation with demand competition

This article examines the capacity allocation decisions in a supply chain in which a supplier sells a common product to two retailers at a fixed wholesale price. The retailers order the supplier's product subject to an allocation mechanism preannounced by the supplier, and compete for the customer demand. We perform an equilibrium analysis of the retailers' ordering decisions under uniform and individually responsive allocations. Uniform allocation guarantees equilibrium orders, but is not necessarily truth inducing in the presence of demand competition. Further, we find that (1) neither the supplier nor either one of the retailers sees its profits necessarily increasing with the supplier's capacity, and the supplier may sell more with a lower capacity level, and (2) capacity allocation may not only affect the supply chain members' profits but also change the supply chain structure by driving a retailer out of the market. This article provides managerial insights on the capacity and ordering decisions for the supplier, the Capacity allocation frequently occurs in supply chains when multiple retailers order a product from a common sup- plier. Capacity is subject to allocation when the supplier's capacity is unable to meet retailer demand. Further, the retail- ers may compete for customer demand for the product. This work is specifically motivated by a capacity allocation prob- lem in the automobile industry. Automobile manufacturers often sell the same model vehicles to multiple dealers in the same geographic region at a fixed wholesale price. The deal- ers are allowed to determine their own retail prices, which are typically lower than the manufacturer's suggested retail price. In this case, the dealers compete for both the manufac- turer's vehicle allocation and their customer demand. Similar capacity allocation also occurs in the sales of office and home supplies, electronics products, textile and apparel products, and so forth. This article examines the capacity allocation decisions in a supply chain, in which a supplier sells a common product to two retailers. The supplier charges a fixed wholesale price and allocates his capacity based on the order sizes of the two retailers, using a preannounced capacity allocation mecha- nism. The retailers order from the supplier and compete for