Capacity reservation contracts for high-tech industry

Capacity reservation provides a risk-sharing mechanism that encourages a manufacturer to expand its capacity more. We propose a deductible reservation (DR) contract where customers reserve future capacity with a fee that is deductible from the purchasing price. The manufacturer’s ex ante announcement of the “excess” capacity that she will have in addition to the reservation amount is a unique feature of the DR contract. An individually rational DR contract that provides channel coordination always exists. Since there is a unique Nash equilibrium for the reservation game among multiple customers, the main results of the one-customer case can be extended to the n-customer case. The DR contract is compared with another capacity reservation contract called take-or-pay. While the manufacturer may gain more profit under a take-or-pay contract, there may not be a channel-coordinated contract that is also individually rational for the customer. Finally, the similarities and differences between the capacity reservation contracts and other well-known supply contracts are discussed.