Capacity reservation for time-sensitive service providers: An application in seaport management

This paper studies a capacity management problem in which a facility provider offers its facility to two service providers. The facility provider can either pool the service providers together to share the facility or reserve a dedicated facility for the service providers. The service providers determine their service capacity levels to serve each market with linear time-sensitive demand. We assume that both the facility provider and the service providers maximize demand rates. We find that the facility provider’s optimal capacity strategy critically depends on the ratio of the service providers’ demand loss rates, which are the demand loss per unit time increase. The facility provider prefers the reservation strategy to the pooling strategy if one service provider’s demand loss rate is significantly larger than the other’s. Otherwise, the facility provider prefers the pooling strategy. From the service providers’ perspective, the service provider who has a large demand loss rate prefers the reservation strategy, but the service provider who has a small demand loss rate prefers the pooling strategy. We also study a centralized system, in which the facility provider fully controls the service providers and hence is able to eliminate the negative effect of the facility competition between the service providers. We find that pooling is always optimal for the facility provider, which suggests that facility capacity competition is a prerequisite condition for not pooling the service providers together. We connect these managerial insights with the operations of seaports in Eastern Asian area (e.g., Hong Kong, Shanghai and etc).