I. Introduction
Capacity planning and pricing decisions are crucial for any manufacturing system. These two controls affect not only the efficiency and effectiveness of the manufacturer but also the long-term competitiveness of the respective supply chain system. To cope with demand increase, a manufacturer often reserves a certain amount of buffer capacity during the low-demand period. However, this buffer capacity is expensive and directly implies a burden to the manufacturer. Thus, how to balance the tradeoff between having insufficient capacity in some periods and excessive capacity in other periods is an important topic in production research. Essentially, it is well reported that when the demand becomes larger than the normal in-house capacity, a manufacturer can usually take the approach of acquiring temporary capacity, e.g., from the spot market or using subcontractors [1]. Although acquiring the temporary capacity (per unit time) is usually more expensive than having the normal in-house capacity (per unit time), it is still beneficial to use such temporary capacity for a short period compared to the cost of owning it for a long time. This business practice is very well supported by the apparel manufacturing industry in Asia. It is known that many apparel manufacturers in Asia are horizontally integrated and that they share (and trade) capacity from time to time under their strategic partnership. Essentially, when one manufacturer receives an order for a fashionable item that requires more capacity than its normal one, it can pay and get extra capacity from another manufacturer. In addition, Li and Fung, a renowned trading enterprise for apparel supply chains, is known to provide services for retailers to secure production, and it also helps in coordinating with multiple manufacturers to work together for fulfilling orders. This is particularly important when the retailer observes a sudden increase of consumer demand and requires an emergency order from the manufacturers. Li and Fung can help by making sure that the manufacturers can react smoothly to this kind of demand disruption within the required lead time [44].