Competition and capacity sharing strategies in supply chain with scale economies

Abstract

This study investigates a supply chain consisting of one supplier and two competing manufacturers, who are subject to economies of scale and produce partially substitutable products. A framework for the bargaining game is constructed to assess the low-cost manufacturer's choice regarding the collaboration of production capacity with its competitor. The analysis is based on three models: a benchmark competition model, a fixed fee capacity sharing model and a hybrid fee capacity sharing model. Results show that each of these strategies can lead to the most favorable economic outcome depending on the degree of demand substitution, the fixed cost, the difference in unit production cost and the bargaining power. The core strategic trade-off lies in balancing the economic gains from capacity sharing against the competitive risks of enabling a stronger rival. These four factors significantly influence the net effect of capacity sharing. The study further finds that both fixed and hybrid fee models can alleviate price competition driven by economies of scale, thereby improving overall profitability. Thus, the presence of economies of scale serves as a strong incentive for capacity collaboration. The findings offer strategic insights for manufacturers dealing with cost asymmetries and competitive pressures in consumer markets and hold meaningful implications for management decision-making.