Capacity allocation in a competitive multi-channel supply chain

This paper addresses the capacity allocation problem for a capacitated manufacturer who can distribute her product to the end customers through an independent retailer channel as well as through her direct channel. Demands of the channels are substitutable, which induces competition between them. We show that to avoid channel competition, it is possible for the manufacturer to deny the retailer of capacity. Specifically, if channel substitution rate is high, a retailer of low demand will never be allocated any capacity even when the available capacity is ample. While, if the channel substitution rate is low, capacity allocation strategy depends on the retailer's demand and the available capacity. Many other interesting managerial insights are provided and illustrated with numerical examples.