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

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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)

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.

Suggested Citation

  • Soo-Haeng Cho & Christopher S. Tang, 2014. "Technical Note---Capacity Allocation Under Retail Competition: Uniform and Competitive Allocations," Operations Research, INFORMS, vol. 62(1), pages 72-80, February.
    • Handle: RePEc:inm:oropre:v:62:y:2014:i:1:p:72-80
    DOI: 10.1287/opre.2013.1234
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    References listed on IDEAS

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    16. Cai, Xueyuan & Li, Jianbin & Lian, Zhaotong & Liu, Zhixin, 2022. "Fixed allocation of capacity for multiple retailers under demand competition," Omega, Elsevier, vol. 110(C).
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    18. Meng, Mingyou & Deng, Shiming & Zhou, Pin & Xu, He, 2023. "The effects of subsidy programs in byproduct synergy operations," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 175(C).
    19. Guillaume Roels & Christopher S. Tang, 2017. "Win-Win Capacity Allocation Contracts in Coproduction and Codistribution Alliances," Management Science, INFORMS, vol. 63(3), pages 861-881, March.
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    21. Wang, Xun & Disney, Stephen M., 2016. "The bullwhip effect: Progress, trends and directions," European Journal of Operational Research, Elsevier, vol. 250(3), pages 691-701.
    22. Schouten, Jop, 2022. "Cooperation, allocation and strategy in interactive decision-making," Other publications TiSEM d5d41448-8033-4f6b-8ec0-c, Tilburg University, School of Economics and Management.
    23. Tony Haitao Cui & Yinghao Zhang, 2018. "Cognitive Hierarchy in Capacity Allocation Games," Management Science, INFORMS, vol. 64(3), pages 1250-1270, March.
    24. Mendonça, Francisco V. & Catalão-Lopes, Margarida & Marinho, Rui Tato & Figueira, José Rui, 2020. "Improving medical decision-making with a management science game theory approach to liver transplantation," Omega, Elsevier, vol. 94(C).
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