To Share or Not to Share? Capacity Reservation in a Shared Supplier

Anyan Qi, Hyun‐Soo Ahn and Amitabh Sinha

Production and Operations Management, 2019, vol. 28, issue 11, 2823-2840

Abstract: When a supplier serves multiple buyers, the buyers often reserve the supplier's capacity in advance to secure the supply to fulfill their demand. In this study, we analyze two common types of capacity reservation: exclusive and first‐priority reservations. Both reservations give a buyer first access to its reserved capacity, but the reservations differ in how the leftovers (if any) are used. In most cases, as long as the buyer gets to use the reserved capacity first, it does not pay attention to how the leftover capacity is utilized, leaving that to the supplier's discretion (first‐priority). However, in a number of cases, buyers prohibit discretionary use of the reserved capacity (“no one touches my leftovers”) and implement the restriction by placing an employee at the supplier or installing monitoring devices (exclusive). One potential benefit of first‐priority capacity is resource pooling: allowing access to one another's leftovers can reduce the amount of capacity reserved by the buyers while enabling the supplier to satisfy buyers’ orders better in some cases. The Operations Management literature suggests that the benefit of resource pooling is greater when the demand correlation is negative and smaller when the correlation is positive. We investigate the capacity reservation type and level that each buyer chooses facing uncertain (and correlated) demand. We investigate how the reservation price and demand correlation affect the equilibrium outcome. We also examine the supplier's decision to set the optimal reservation prices. We find that at least one firm reserves first‐priority capacity in equilibrium as long as the supplier offers a discount for first‐priority capacity (or charges a premium for exclusive capacity). Depending on the reservation price difference and demand correlation, we find that the equilibrium outcome is inefficient (i.e., not Pareto optimal) for the buyers when they settle in a free‐rider or a prisoner's dilemma equilibrium. We show that the supplier always induces both buyers to reserve a large amount of exclusive capacity so that the supplier can make profits from both capacity reservation and production. While this seems like the best scenario for the supplier, we show that, allowing bilateral capacity transfer (e.g., the buyers trading their reserved capacity) can improve not only the buyers’ profits but also the supplier's profit.

Date: 2019
References: Add references at CitEc
Citations: View citations in EconPapers (3)

Downloads: (external link)
https://doi.org/10.1111/poms.13081

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:bla:popmgt:v:28:y:2019:i:11:p:2823-2840

Ordering information: This journal article can be ordered from
http://onlinelibrary ... 1111/(ISSN)1937-5956

Access Statistics for this article

Production and Operations Management is currently edited by Kalyan Singhal

More articles in Production and Operations Management from Production and Operations Management Society
Bibliographic data for series maintained by Wiley Content Delivery ().