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Managing Downstream Competition via Capacity Allocation
Author(s) -
Chen Fangruo,
Li Jianbin,
Zhang Hanqin
Publication year - 2013
Publication title -
production and operations management
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 3.279
H-Index - 110
eISSN - 1937-5956
pISSN - 1059-1478
DOI - 10.1111/j.1937-5956.2012.01373.x
Subject(s) - competition (biology) , business , supply chain , microeconomics , industrial organization , lexicographical order , product (mathematics) , downstream (manufacturing) , cournot competition , production (economics) , supply chain management , economics , marketing , geometry , mathematics , combinatorics , biology , ecology
Consider a supply chain with one supplier and multiple retailers. The supplier produces a single product and sells it to the retailers, who in turn sell the product to consumers. The supplier has limited production capacity, and the retailers are engaged in a Cournot competition at the consumer/market level. When the sum of the retailer orders exceeds the capacity, the supplier allocates her capacity according to a pre‐announced allocation mechanism. Two mechanisms are considered: proportional allocation and lexicographic allocation. An extensive study of the two allocation mechanisms shows that the lexicographic mechanism has the ability to dampen the competition at the retail level, increasing the profits for both the supplier and the supply chain.