Sub-level Inequality Aversion in Capacity Allocation

Through a behavior study, we investigate suppliers’ capacity allocation behavior in a limited capacity setting, where retailers order exceeds suppliers’ capacity. Capacity shortages are common in many supply chains. In such situations, the capacity-constrained supplier needs to divide the limited capacity among the retailers. We explore the plurality of suppliers’ capacity allocation rules and the sub-level inequality aversion behavior that the tendency to minimize the difference between the two retailers. To analyze the supplier’s decisions, we used a random utility model that estimate simultaneously the prevalence of three capacity allocation rules among the suppliers and distribution of the weight they attach to sub-level inequality. Our experimental findings suggest that a large majority of suppliers make allocation decisions consistent with proportional rules but that uniform allocation and linear allocation rules also find considerable support. Importantly, suppliers’ allocating decisions are adjusted by sub-level inequality aversion.