Strategic substitutes or complements? The relationship between capacity sharing and postponement flexibility

To address supply-demand mismatch, firms can develop postponement flexibility in advance, which can shorten their production lead-time by allowing for production after demand is observed, or they can reach capacity sharing agreements and share the leftover capacity with each other. We develop a game model of two symmetric firms, and compare their optimal capacity strategies under two scenarios: with and without capacity sharing. In particular, we focus on the relationship between postponement flexibility and capacity sharing. We find that postponement flexibility and capacity sharing may be either complements or substitutes. Specifically, counter intuitively, when capacity costs are relatively high, these two methods are complemented; otherwise, they are substituted. Moreover, we show that a higher demand correlation between firms always decreases substitutability while increases complementarity when the capacity transfer price is relatively low. In addition, a higher capacity transfer price also reduces substitutability and reinforces complementarity. Finally, we find that capacity sharing stimulates firms to invest at a medium capacity level to largely achieve broad supply-demand matching between firms and may incentivize them to adopt different capacity types.