Customer satisfaction and supplier loyalty in markets where products are mainly undifferentiated are heavily affected by assurance of supply. Marketers manage production capacity in such markets to assure supply, but the resulting capacity competition leads to cycles of over-capacity followed by capacity deletions, which lead to under-capacity. We investigate some of the possible causes of this form of industry behavior in two ways. First, we report on an exploratory empirical investigation, motivated by in-depth interviews with industry executives, and develop a set of structural principles. We formalize those principles in a set of statistical models. Next, we review some related theory and identify a number of possible reasons that may combine to cause this phenomenon. We develop some simple, game theoretic models that focus on the issues of strategic interaction with demand uncertainty and different values of capacity change. We use the theory results to illustrate how over- and under-capacity situations arise. We compare our theoretical and empirical results and find an encouraging degree of convergence. We discuss the implications of these findings for individual firm strategies.
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