Capacity Sharing between Competitors

Market competition may lead to mismatch between supply and demand. That is, overpricing maygive rise to underselling, and underpricing may yield stockout. Capacity sharing is a commonpractice to align excessive capacity with excessive demand. Yet the strategic interaction betweencompetition and capacity sharing has not been adequately addressed. In this paper we investigateoptimal strategies and firm profi tability of capacity sharing between competing fi rms under both exante and ex post contracting, depending on whether the capacity sharing price is determined beforeor after price setting in the buyer market. We show that, with symmetric capacity, committing toan overly high capacity sharing price may not necessarily improve fi rm payoff s. Capacity sharingsoftens price competition under either contracting scheme, whereas the optimal capacity transferprice and equilibrium profi ts may be non-monotonically influenced by buyer loyalty. The equilibriumoutcome under ex ante contracting is more sensitive to variations in market parameters than expost contracting. As a result, ex ante contracting is more likely to be preferred when the endowedcapacity is low or buyer loyalty is high. However, when fi rms' capacity is asymmetric, capacitysharing may intensify equilibrium competition and hurt firm profi tability through reversing the firms' relative pricing aggressiveness