A horizontal capacity reservation game under asymmetric information

We investigate a common horizontal dual-sourcing model in the semiconductor industry. The supply chain consists of an integrated device manufacturer (IDM) and a pure-play foundry. The IDM can make internal production and source from the foundry, and only the IDM sells the products to the market. Both the IDM and the foundry must invest in production capacity before making production. We consider stochastic one-period demand, which can either be a high type or a low type. We assume that the true demand type is private information to the IDM such that the IDM and the foundry engage in a signalling game. We identify the unique separating equilibrium in this asymmetrical information setting. We find that information asymmetry may mitigate or aggravate the double marginalisation effect, and that it may also affect the capacity allocation between the IDM and the foundry. Furthermore, we conduct a numerical study to investigate the sensitivity of the equilibrium and the information rent.