Mechanism design for capacity allocation with price competition

Studies on mechanism design mostly focus on a single market where sellers and buyers trade. This paper examines the problem of mechanism design for capacity allocation in two connected markets where a supplier allocates products to a set of retailers and the retailers resale the products to end-users in price competition. We consider the problems of how allocation mechanisms in the upstream market determine the behaviors of markets in the downstream market and how pricing policy in the downstream market influences the properties of allocation mechanisms. We classify an effective range of capacity that influences pricing strategies in the downstream market according to allocated quantities. Within the effective capacity range, we show that the retailers tend to inflate orders under proportional allocation, but submit truthful orders under uniform allocation. We observe that heterogeneous allocations results in greater total retailer profit which is a unique phenomenon in our model. The results would be applied to the design and analysis of Business-to-Business (B2B) marketplaces and supply chain management.