Capacity Leadership

Ozge Islegen, Erica L. Plambeck

Research output: Working paper

Abstract

This paper examines capacity leadership, in which a manufacturer builds capacity early (before it can be utilized) in order to motivate a supplier to build complementary capacity. The supplier anticipates negotiating a higher payment per unit because the manufacturer’s capacity costs are sunk. When the supplier’s capacity investment is noncontractible and the supplier’s bargaining strength is moderately high, capacity leadership by the manufacturer strictly increases both firms’ expected profits. The manufacturer’s optimal level of early capacity increases as the selling price and demand for the end product increase, capacity costs decrease, or she obtains private information that demand is likely to be high. Even if the supplier’s capacity investment is contractible, the manufacturer may achieve greater expected profit through capacity leadership than a contract. These results may help to explain why several manufacturers of renewable energy and energy-efficient products have built capacity early, before it could be utilized.
Original languageEnglish (US)
Number of pages16
StatePublished - 2009

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    Islegen, O., & Plambeck, E. L. (2009). Capacity Leadership.