Revenue sharing contracts for horizontal capacity sharing under competition

The capacity-sharing strategy is a widely used strategy to alleviate the mismatch between supply and demand. To investigate the performance of the capacity-sharing strategy, we consider two firms competing for business in a single market in this paper. Both firms can choose to join the horizontal capacity-sharing strategy with a revenue-sharing contract. By comparing the equilibrium solutions of analytical models where firms share capacities and firms don’t share capacities respectively, we find that both firms raise their prices with a low revenue sharing rate when the total desired demand can be satisfied by the total capacities; But the change of prices depends on the combined effect of competition intensity and the revenue sharing rate if the capacity sharing can’t satisfy the total desired demand. In addition, we find that the profit of the firm with insufficient capacity increases if capacity sharing is present. However, the profit of the firm with underutilized capacity increases in the revenue sharing rate when it is small, but decreases in it when it becomes relatively large. Thus, capacity sharing is not always better for the firm with underutilized capacity.