Capacity choice and allocation: Strategic behavior and supply chain performance

We consider a simple supply chain in which a single supplier sells to sever al downstream retailers. The suppliers has limited capacity, and retailers are privately informed of their optimal stocking levels. If retailer orders exceed available capacity, the supplier allocates capacity using a publicl y known allocation mechanism, a mapping from retailer orders to capacity as signments. We show that a broad class of mechanisms are prone to manipulati on: Retailers will order more than they need to gain a more favorable alloc ation. Another class of mechanisms induces the retailers to order exactly t heir needs, thereby revealing their private information. However, there doe s not exist a truth-inducing mechanism that maximizes total retailer profit s. We also consider the supplier's capacity choice. We show that a manipulable mechanism may lead the supplier to choose a higher level of capacity than she would under a truth-inducing mechanism. Nevertheless, her choice will a ppear excessively restrictive relative to the prevailing distribution of or ders. Furthermore, switching to a truth-inducing mechanism can lower profit s for the supplier, the supply chain, and even her retailers. Hence, truth- telling is not a universally desirable goal.