Online demand disruption in the presence of constrained capacity

Abstract Demand disruptions are common during emergencies and are typically accompanied by capacity constraints. Using a model in which a firm sells products through an online platform channel and an offline direct channel, we study the effect of demand disruptions on the firm and the online platform in the presence of constrained capacity. Our analysis reveals that prices in both channels are all subject to markup due to constrained capacity in the absence of demand disruptions. When the demand disruption is sufficiently mild, the firm adopts the constant online allocation strategy with sufficient capacity and the constant allocation strategy with limited capacity. When demand fluctuates substantially, the firm chooses a flexible allocation strategy or allocation‐shifting strategy according to whether the capacity is sufficient or constrained. Different from prior studies, the boundary of the firm's optimal strategies depends on the capacity constraint. Furthermore, we find that when the capacity is low relative to some threshold, increasing capacity harms the firm's profits. Finally, we impart insights and provide guidance for the firm in determining optimal pricing and product allocation strategies when facing demand disruptions in other related emergency scenarios.