Capacity allocation under downstream competition and bargaining

In this study, we consider a monopolistic supplier’s capacity-allocation problem under bargaining. The supplier can allocate one type of key element to either an external channel with a manufacturer, an internal channel, or both. The firms use the element to produce substitutable final products and compete in the product market. By building a stylized model, we characterize the equilibrium decisions under different channel choices. The conditions of the equilibrium channel choices are derived. We find that the supplier’s shared capacity increases with his bargaining power, but the manufacturer’s shared capacity decreases with her bargaining power. Meanwhile, the higher bargaining power may backfire on the manufacturer, because her loss from a decreased shared capacity may dominate her benefit from an increase in her bargaining power.