Design for Channel Coordination

Design of network systems is an engineering effort of providing communication services. In this paper, we investigate a strategic implication of design decision on channel coordination. In our model, the system is designed by an upstream monopoly vendor and used by downstream retailers who provide service to end users. We show that the joint presence of demand uncertainty and intra-channel competition can lead to the so-called ”Bertrand Supertrap”, i.e., a seemly inferior design that limits firms’ ability to expand capacity is actually desirable for maximizing channel profit. We derive a threshold condition for such design to be chosen and also discuss impacts of the design on social welfare and consumer surplus.