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Service-based capacity strategy for manufacturing service duopoly of differentiated prices and lognormal random demand


  • Chou, Yon-Chun
  • Chung, Hsien-Jung


Globalization of production has ushered in vibrant manufacturing service industries whose business is to serve the production needs of product engineering firms. In these engineering-manufacturing chains, risk of capacity supply is an important concern for product firms as manufacturers are normally conservative in capacity expansion, especially when demand uncertainty and investment risk are high. To provide quality manufacturing services, this risk must be taken into consideration in formulating a capacity strategy. This paper presents a competition analysis method based on supply risk for a manufacturing duopoly of differentiated prices and lognormal random demand. A novel service-based demand rationing rule is first proposed. Reaction curves and equilibrium of capacity strategy are next derived. Finally, competition behavior of the duopoly is analyzed.

Suggested Citation

  • Chou, Yon-Chun & Chung, Hsien-Jung, 2009. "Service-based capacity strategy for manufacturing service duopoly of differentiated prices and lognormal random demand," International Journal of Production Economics, Elsevier, vol. 121(1), pages 162-175, September.
  • Handle: RePEc:eee:proeco:v:121:y:2009:i:1:p:162-175

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    References listed on IDEAS

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    7. De Borger, Bruno & Van Dender, Kurt, 2005. "Prices, capacities and service quality in a congestible Bertrand duopoly," University of California Transportation Center, Working Papers qt1k51437c, University of California Transportation Center.
    8. Cattani, Kyle D. & Dahan, Ely & Schmidt, Glen M., 2008. "Tailored capacity: Speculative and reactive fabrication of fashion goods," International Journal of Production Economics, Elsevier, vol. 114(2), pages 416-430, August.
    9. Chou, Yon-Chun & Cheng, C.-T. & Yang, Feng-Cheng & Liang, Yi-Yu, 2007. "Evaluating alternative capacity strategies in semiconductor manufacturing under uncertain demand and price scenarios," International Journal of Production Economics, Elsevier, vol. 105(2), pages 591-606, February.
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    11. Ciaran Driver & Fabrice Goffinet, 1998. "Investment under Demand Uncertainty, Ex-Ante Pricing, and Oligopoly," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 13(4), pages 409-423, August.
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    Cited by:

    1. Roy, Arpita & Sana, Shib Sankar & Chaudhuri, Kripasindhu, 2012. "Optimal replenishment order for uncertain demand in three layer supply chain," Economic Modelling, Elsevier, vol. 29(6), pages 2274-2282.
    2. Sana, Shib Sankar, 2013. "Optimal contract strategies for two stage supply chain," Economic Modelling, Elsevier, vol. 30(C), pages 253-260.
    3. Wang, Yulan & Wallace, Stein W. & Shen, Bin & Choi, Tsan-Ming, 2015. "Service supply chain management: A review of operational models," European Journal of Operational Research, Elsevier, vol. 247(3), pages 685-698.


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