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.