Capacity sharing between competitors considering consumer switching

This is the authors' abstract. We don't add key points for this paper.

The mismatch between supply and demand is a prevailing phenomenon due to fluctuations in market demand. A common practice employed to align capacity with demand is capacity sharing, whereby a firm possessing excess capacity collaborates with others that are incapable of meeting captured demand. This paper investigates the strategic interactions between two competing firms with asymmetric capacities in the presence of capacity sharing. Following some observed phenomena, unilateral consumer switching is allowed once stockout occurs. Two typical capacity‐sharing contracts, namely, linear transfer payment (LTP) and revenue sharing (RS), are examined. We show analytically that the presence of capacity sharing can always benefit the firm with insufficient resources. However, the impacts on the firm that is not constrained by capacity under the RS contract depend heavily on the RS rate. We also find that the RS contract outperforms the LTP contract for both firms if the negotiated RS rate is at an intermediate level. The results obtained through the comparison between the scenarios of no capacity sharing, LTP, and RS provide suggestions of much practical value for the operation of capacity sharing.