Benefits of Collaboration in Capacity Investment and Allocation

41 Pages Posted: 1 Nov 2012

See all articles by Eren Cetinkaya

Eren Cetinkaya

The Stephen M. Ross School of Business at the University of Michigan

Hyun-Soo Ahn

University of Michigan, Stephen M. Ross School of Business

Izak Duenyas

University of Michigan, Stephen M. Ross School of Business

Date Written: September 16, 2012

Abstract

This paper studies capacity collaboration between two (potentially competing) firms. We explore the ways that the firms can collaborate by either building capacity together or sharing the existing capacity for production. We consider cases where the two firms' products are potential substitutes and also where the firms' products are independent. We find that a firm can benefit from collaboration even with its competitor. Moreover, the firms do not have to jointly make the production decisions to realize the benefits of collaboration. We consider a model where firms build capacity before demand is realized and make production decisions after they receive a demand signal. They can potentially collaborate in jointly building capacity and/or in exchanging capacity once they receive their demand signals. Interestingly, we find that having firms compete at the production stage can result in firms deciding to build less overall capacity than if they coordinated capacity investment and production. Also, we find that though collaboration in capacity investment is bene cial, collaboration in production using existing capacity is often more beneficial. The benefits of collaboration is largest when competition is more intense, demand is more variable and cost of investment is higher.

Keywords: Supply Chain Management, Capacity, Bargaining Solution

JEL Classification: C78, M11

Suggested Citation

Cetinkaya, Eren and Ahn, Hyun-Soo and Duenyas, Izak, Benefits of Collaboration in Capacity Investment and Allocation (September 16, 2012). Ross School of Business Paper No. 1179, Available at SSRN: https://ssrn.com/abstract=2169490 or http://dx.doi.org/10.2139/ssrn.2169490

Eren Cetinkaya (Contact Author)

The Stephen M. Ross School of Business at the University of Michigan ( email )

701 Tappan St
R5456
Ann Arbor, MI 48109-1234
United States

Hyun-Soo Ahn

University of Michigan, Stephen M. Ross School of Business ( email )

701 Tappan St
R5456
Ann Arbor, MI 48109-1234
United States

Izak Duenyas

University of Michigan, Stephen M. Ross School of Business ( email )

701 Tappan Street
Ann Arbor, MI MI 48109
United States

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