Competitive Capacity and Price Decisions for Two Build-to-Order Manufacturers Facing Time-Dependent Demands

Abstract

This paper develops game-theoretic models to investigate the optimal competitive capacity-price decisions for two build-to-order manufacturers when they face the disruption of a random demand surge. Both manufacturers have their fixed capacity and pricing decisions for the low-demand period. When there is a sudden demand increase, they can temporally acquire extra capacity and change their pricing decisions. Our goal is to determine the optimal joint capacity and pricing decisions for both low- and high-demand periods. We show that there exists a unique subgame perfect Nash equilibrium that is affected by the distribution of the disrupted amount of demand, the duration of the demand change, the market scale, the unit production cost, and the subcontracting cost. The recommendations on how and when the manufacturers should strategically increase their profits by adjusting their capacities and prices are provided. We also find that the demand disruption largely influences the motivation of the manufacturers to acquire capacity information when the cost of acquiring capacity information is considered. The effects of capacity and pricing competition are investigated. Insights are generated, and future research directions are outlined.