Strategic Capacity Commitment: A Channel Competition Perspective

Motivated by numerous real-world examples, where a centralized channel, comprising a centralized manufacturer, competes against a decentralized channel consisting of a decentralized manufacturer and a retailer (e.g., Tesla versus General Motors), we investigate the strategic value of capacity commitment in such asymmetric channels competition. Utilizing a game-theoretic model, we demonstrate that capacity commitment by the centralized manufacturer serves as a form of strategic communication to the decentralized manufacturer, leading to an increase in its wholesale price. Consequently, price competition between the centralized manufacturer and the retailer is mitigated, providing benefits to both the centralized channel and the decentralized channel. The decentralized manufacturer profits from a higher wholesale price, albeit a lower sales quantity by the retailer, potentially harming the retailer. The overall impact on the retailer, considering the mitigated competition and enhanced wholesale price, is contingent upon the degree of differentiation between the products. Ironically, although the decentralized manufacturer gains from capacity commitment by the competing centralized manufacturer, it never benefits by committing to capacity itself when capacity commitment is costless once the centralized manufacturer commits to capacity. We further generalize our model to show that the channel structure of the rival is a fundamental driver in unlocking the strategic value of capacity commitment for a firm. Additionally, we explore various extensions to validate the robustness of our findings.

History: Olivier Toubia served as the senior editor.

Funding: This work was supported by the National Natural Science Foundation of China [Grants 72102023 and 72572024].

Supplemental Material: The online appendices are available at https://doi.org/10.1287/mksc.2023.0139.