Strategic substitutes or complements? The relationship between capacity sharing and postponement flexibility

Liqun Wei and Jianxiong Zhang

European Journal of Operational Research, 2021, vol. 294, issue 1, 138-148

Abstract: To address supply-demand mismatch, firms can develop postponement flexibility in advance, which can shorten their production lead-time by allowing for production after demand is observed, or they can reach capacity sharing agreements and share the leftover capacity with each other. We develop a game model of two symmetric firms, and compare their optimal capacity strategies under two scenarios: with and without capacity sharing. In particular, we focus on the relationship between postponement flexibility and capacity sharing. We find that postponement flexibility and capacity sharing may be either complements or substitutes. Specifically, counter intuitively, when capacity costs are relatively high, these two methods are complemented; otherwise, they are substituted. Moreover, we show that a higher demand correlation between firms always decreases substitutability while increases complementarity when the capacity transfer price is relatively low. In addition, a higher capacity transfer price also reduces substitutability and reinforces complementarity. Finally, we find that capacity sharing stimulates firms to invest at a medium capacity level to largely achieve broad supply-demand matching between firms and may incentivize them to adopt different capacity types.

Keywords: Manufacturing; Capacity sharing; Postponement flexibility; Strategic substitutes; Strategic complements (search for similar items in EconPapers)
Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0377221721000187
Full text for ScienceDirect subscribers only

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:eee:ejores:v:294:y:2021:i:1:p:138-148

DOI: 10.1016/j.ejor.2021.01.016

Access Statistics for this article

European Journal of Operational Research is currently edited by Roman Slowinski, Jesus Artalejo, Jean-Charles. Billaut, Robert Dyson and Lorenzo Peccati

More articles in European Journal of Operational Research from Elsevier
Bibliographic data for series maintained by Catherine Liu ().