Optimal Capacity Expansion Policy with Given Reservation Contracts

With a deductible reservation contract proposed, this paper characterizes an optimal capacity expansion policy on innovative product in a single-period setting. We describe a negotiation process for capacity expansion as a Stackelberg game in which the supplier is the leader and the retailer is the follower. Specifically, with the reservation contract exogenously given, we first investigate the retailer´s optimal strategy. Then we study the optimal capacity expansion policy for the supplier and finally explore the effects of reservation price on the retailer and supplier´s optimal decisions.