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Keywords:

  • supply chain management;
  • capacity agent;
  • market equilibrium;
  • contract design

We consider a setting of two firms and one capacity agent. Each firm serves a primary market, and the capacity agent sustains a common market to draw demand for capacity from the external firms. The firms can partner with the capacity agent under her contract to serve the common market. When they use the common market mainly as an outlet for their unused capacities, the capacity agent will only specify a variable fee for each capacity unit deployed through her, and prefer to partner with one firm in most circumstances. When the firms adjust capacities to accommodate the businesses created by serving the common market, the capacity agent will specify a lump-sum payment and a variable fee, and will be more likely to incentivize only one firm to partner with her, when the common market is sufficiently large or the demands in the common and primary markets are strongly correlated. She will always use a fixed fee to extract, while not necessarily all, the profit gains to the firms serving the common market, but will use a variable fee only when partnering with both firms. The key results are robust with respect to market configuration and contract type.