Capacity Choice and Allocation: Strategic Behavior and Supply Chain Performance, Management Science
A simple supply chain in which a single supplier sells to several downstream retailers is considered. The supplier has limited capacity, and retailers are privately informed of their optimal stocking levels. If retailer orders exceed available capacity, the supplier allocates capacity using a publicly known allocation mechanism, a mapping from retailer orders to capacity assignments. It is shown that a broad class of mechanisms are prone to manipulation; retailers will order more than they need to gain a more favorable allocation. Another class of mechanisms induces the retailers to order exactly their needs, thereby revealing their private information. However, there does not exist a truth-inducing mechanism that maximizes total retailer profits. The supplier's capacity choice is also considered. It is shown that a manipulable mechanism may lead the supplier to choose a higher level of capacity than one would under a truth-inducing mechanism. Nevertheless, one's choice will appear excessively restrictive relative to the prevailing distribution of orders.
Martin Lariviere, G Cachon
Lariviere, Martin, and G Cachon. 1999. Capacity Choice and Allocation: Strategic Behavior and Supply Chain Performance. Management Science. 45(8): 685-703.