Premium
Strategic obfuscation of production capacities
Author(s) -
DurangoCohen Elizabeth J.,
Wagman Liad
Publication year - 2014
Publication title -
naval research logistics (nrl)
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.665
H-Index - 68
eISSN - 1520-6750
pISSN - 0894-069X
DOI - 10.1002/nav.21581
Subject(s) - obfuscation , incentive , profit (economics) , business , industrial organization , production (economics) , competition (biology) , supply chain , microeconomics , constraint (computer aided design) , strategic complements , economics , marketing , computer science , computer security , mechanical engineering , ecology , engineering , biology
Recent supply‐chain models that study competition among capacity‐constrained producers omit the possibility of producers strategically setting wholesale prices to create uncertainty with regards to (i.e., to obfuscate) their production capacities. To shed some light on this possibility, we study strategic obfuscation in a supply‐chain model comprised of two competing producers and a retailer, where one of the producers faces a privately‐known capacity constraint. We show that capacity obfuscation can strictly increase the obfuscating producer's profit, therefore, presenting a clear incentive for such practices. Moreover, we identify conditions under which both producers' profits increase. In effect, obfuscation enables producers to tacitly collude and charge higher wholesale prices by moderating competition between producers. The retailer, in contrast, suffers a loss in profit, raises retail prices, while overall channel profits decrease. We show that the extent of capacity obfuscation is limited by its cost and by a strategic retailer's incentive to facilitate a deterrence. © 2014 Wiley Periodicals, Inc. Naval Research Logistics 61: 244–267, 2014