Consider a supplier selling to multiple retailers. Demand varies across per
iods, but the supplier's capacity and wholesale price are fixed. If demand
is high, the retailers' needs exceed capacity, and the supplier must implem
ent an allocation mechanism to dole out production. We examine how the choi
ce of mechanism impacts retailer actions and supply chain performance. In p
articular,we analyze turn-and-earn allocation, a method commonly used in th
e automobile industry. This scheme bases current allocations on past sales
and thus enables retailers to influence-their future allocations; they comp
ete for scarce capacity even if they do not compete for customers.
We show that turn-and-earn induces the retailers to increase their sales wh
en demand is low and the supplier's capacity is otherwise underutilized. Su
pplier profits thus increase. The impact on the supply chain depends on how
restrictive capacity is. With mildly tight capacity, the retailers' higher
sales rate does not significantly lower their profits but does reduce the
cost of idle capacity. Supply chain performance improves; With extremely ti
ght capacity, the retailers' intense competition dissipates more profits th
an the supplier gains, and supply chain performance suffers. Consequently,
turn-and-earn does not generally coordinate the system. It is best characte
rized asa means for the supplier to increase her profits at the expense of
the retailers and potentially even the supply chain. Furthermore, these res
ults hold even if the retailers can hold inventory in anticipation of scarc
e capacity.