Technical Note---Capacity Allocation Under Retail Competition: Uniform and Competitive Allocations

Soo-Haeng Cho () and Christopher S. Tang ()
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Soo-Haeng Cho: Tepper School of Business, Carnegie Mellon University, Pittsburgh, Pennsylvania 15213
Christopher S. Tang: Anderson School of Management, University of California, Los Angeles, Los Angeles, California 90095

Operations Research, 2014, vol. 62, issue 1, 72-80

Abstract: When retailers' orders exceed the supplier's available capacity, the supplier allocates his capacity according to some allocation rule. When retailers are local monopolists, uniform allocation eliminates the “gaming effect” so that each retailer orders her ideal allocation. However, when two retailers engage in Cournot competition under complete information, a recent study has shown that uniform allocation fails to eliminate the gaming effect so that some retailer may inflate her order strategically. By examining a more general situation in which two or more retailers engage in Cournot competition under complete information, we establish exact conditions under which uniform allocation fails to eliminate the gaming effect. These exact conditions enable us to construct a new rule called competitive allocation that can eliminate the gaming effect. Without inflated orders from the retailers, the supplier's profit could be lower under competitive allocation than under uniform allocation when certain restrictive conditions hold. In contrast, competitive allocation generates higher average profits for the retailers and for the supply chain; hence, it reduces the inefficiency of the decentralized supply chain.

Keywords: games/group decisions; inventory/production: capacity allocation (search for similar items in EconPapers)
Date: 2014
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Citations: View citations in EconPapers (27)

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