Long Term Partnership for Achieving Efficient Capacity Allocation

We consider a manufacturer and a group of buyers who partner to share a scarce but expensive-to-build capacity over a finite horizon subject to fluctuating market conditions. The manufacturer must build the capacity before the buyers learn their actual needs. Each member has private history-dependent demand information and makes unverifiable investments. Because the value of the capacity to each partner is highly uncertain, it is challenging for the partnership to achieve supply chain efficiency while sustain under a dynamic environment. By introducing a novel breach remedy, we construct a long term membership agreement that enforces ex-post efficient capacity allocation and ex-ante investments. This agreement is also self-supporting and voluntary, allowing any or all members to dissolve the agreement at any time with provisions for compensation and division of the capacity.