Capacity Reservation Strategies under Quantity Competition with Demand Uncertainty

51 Pages Posted: 14 Apr 2021

See all articles by Shujie Luan

Shujie Luan

Southeast University - School of Economics and Management

Weili Xue

Southeast University - School of Economics and Management

Lijun Ma

Shenzhen University

Tao Li

Santa Clara University

Date Written: April 14, 2021

Abstract

In this paper, we consider a supplier serving two competing manufacturers who produce and sell their products in the same market faced with the uncertain demand. The manufacturers can either participate in the supplier development programme by reserving their capacities from the supplier before the demand is realized, which is referred to as the advance reservation, or do not by reserving their capacities after the demand is realized, which is referred to as the regular reservation. Given the unit capacity wholesale prices for both the advance reservation and the regular reservation, we study the manufacturers' capacity reservation and selling, and the supplier's capacity building decisions in equilibrium when the advance reservation strategy is adopted by neither, one, or both of manufacturers. We further investigate the equilibrium reservation strategies of manufacturers. We discover that completely symmetric manufacturers may choose different capacity reservation strategies, in which case, a unique mixed strategy equilibrium also arises. We also identify the conditions under which the capacity reservation preferences of all supply chain members can be aligned, thus achieving the efficiency of the supply chain. Our findings underscore the importance of operational characteristics in determining
the capacity reservation strategies.

Keywords: cournot competition; demand uncertainty; supply risk; advance reservation; regular reservation

Suggested Citation

Luan, Shujie and Xue, Weili and Ma, Lijun and Li, Tao, Capacity Reservation Strategies under Quantity Competition with Demand Uncertainty (April 14, 2021). Available at SSRN: https://ssrn.com/abstract=3826262 or http://dx.doi.org/10.2139/ssrn.3826262

Shujie Luan

Southeast University - School of Economics and Management ( email )

Sipailou 2#
Nanjing, Jiangsu Province 210096
China

Weili Xue (Contact Author)

Southeast University - School of Economics and Management ( email )

Sipailou 2#
Nanjing, Jiangsu Province 210096
China

Lijun Ma

Shenzhen University ( email )

3688 Nanhai Road, Nanshan District
Shenzhen, Guangdong 518060
China

HOME PAGE: http://ma.szu.edu.cn

Tao Li

Santa Clara University ( email )

500 El Camino Real
Santa Clara, CA 95053
United States

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