Pricing and Capacity Allocation in Opaque Selling

Abstract

To solve the supply and demand mismatch problem, intermediaries have emerged as an opaque channel for service providers to dispose of leftover capacity. This paper focuses on pricing and capacity allocation in opaque selling. We develop a Stackelberg game model, where two capacity-constrained service providers first decide the capacity allocated to an intermediary who then determines the opaque price based on its capacity. We examine the conditions under which the service providers should cooperate with the intermediary, and find that the opaque price and capacity allocation decisions are affected by product type, service providers’ capacity, and commission rate. Moreover, we find that the service providers may fall into the prisoner's dilemma when distributing through the intermediary. It indicates that although opaque selling can bring service providers more profit, it may not help them achieve the optimal profit. In view of this, we propose an alliance policy to eliminate the prisoners’ dilemma and examine when the service providers should ally. Results show that this policy can improve the profits of the service providers and the whole supply chain if the commission rate is adequately low. Our findings suggest that opaque selling can be less beneficial than previously shown and demonstrate the importance of an alliance policy.