Strategic obfuscation of production capacities

• Published in: Naval research logistics 2014-04, Vol.61 (3), p.244-267
• Main Authors: Durango-Cohen, Elizabeth J., Wagman, Liad
• Format: Article
• Language: English
• Subjects: capacity constraints; Channels; Charge; Competition; Cost engineering; Incentives; Logistics; Naval; obfuscation; pricing; strategic manipulation; supply chain; Uncertainty
• ISSN: 0894-069X; 1520-6750
• DOI: 10.1002/nav.21581

Recent supply‐chain models that study competition among capacity‐constrained producers omit the possibility of producers strategically setting wholesale prices to create uncertainty with regards to (i.e., to obfuscate) their production capacities. To shed some light on this possibility, we study strategic obfuscation in a supply‐chain model comprised of two competing producers and a retailer, where one of the producers faces a privately‐known capacity constraint. We show that capacity obfuscation can strictly increase the obfuscating producer's profit, therefore, presenting a clear incentive for such practices. Moreover, we identify conditions under which both producers' profits increase. In effect, obfuscation enables producers to tacitly collude and charge higher wholesale prices by moderating competition between producers. The retailer, in contrast, suffers a loss in profit, raises retail prices, while overall channel profits decrease. We show that the extent of capacity obfuscation is limited by its cost and by a strategic retailer's incentive to facilitate a deterrence. © 2014 Wiley Periodicals, Inc. Naval Research Logistics 61: 244–267, 2014