Less is More? The Strategic Role of Retailer Capacity

Posted: 10 Feb 2020

See all articles by Yinliang (Ricky) Tan

Yinliang (Ricky) Tan

University of Houston - C.T. Bauer College of Business

Yan Xiong

The Hong Kong University of Science and Technology

Huazhong Zhao

City University of Hong Kong

Xi Li

The University of Hong Kong - School of Business

Date Written: January 16, 2020

Abstract

Retailers are often short on capacity, so a logical assumption would be that retailers could improve their profits by acquiring more. In this study, we show that this is not necessarily true, because retailer’s capacity has a strategic role in channel distribution. Specifically, we consider a setting with multiple suppliers and a common retailer. Our analysis reveals that, first, when the retailer's capacity is limited, its suppliers will compete head-to-head for the retailer's capacity, thereby driving down the equilibrium wholesale prices. Second, when the number of suppliers is large, the retailer finds it optimal to limit its own capacity to induce fierce competition among the suppliers. The result also holds when the suppliers and the retailer are contracted through two-part tariffs. Third, when capacity is scarce, the retailer prefers two-part tariffs to wholesale prices, while the suppliers prefer wholesale prices to two-part tariffs. This is because two-part tariffs enhance the retailer's capacity allocation power, which is translated into retailer profit. Nonetheless, when suppliers can freely choose between two-part tariffs and wholesale prices, they always choose two-part tariffs, leading to a form of prisoner's dilemma. We also demonstrate the robustness of our findings by considering exclusive contracts, sequential procurement scenario, and positive capacity cost. Our results underscore the importance of considering the retailer's capacity in channel management.

Keywords: supply chain management, retailer's capacity, wholesale contract, two-part tariff

Suggested Citation

Tan, Yinliang and Xiong, Yan and Zhao, Huazhong and Li, Xi, Less is More? The Strategic Role of Retailer Capacity (January 16, 2020). Available at SSRN: https://ssrn.com/abstract=3520847

Yinliang Tan (Contact Author)

University of Houston - C.T. Bauer College of Business ( email )

Houston, TX 77204-6021
United States

Yan Xiong

The Hong Kong University of Science and Technology ( email )

HKUST
Kowloon
Hong Kong
Hong Kong

Huazhong Zhao

City University of Hong Kong ( email )

83 Tat Chee Avenue
Kowloon
Hong Kong

Xi Li

The University of Hong Kong - School of Business ( email )

Meng Wah Complex
Pokfulam Road
Hong Kong
China

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Abstract Views
403
PlumX Metrics