We consider a decentralized supply chain consisting of a supplier and a retailer facing price- and lead-time-sensitive demand. The decision process is modelled by a Stackelberg game where the supplier, as a leader, determines the capacity and the wholesale price, and the retailer, as a follower, determines the sale price and lead time. The equilibrium strategy of these two players is obtained. By comparing with the performance of the corresponding decentralized chain without capacity decision as a benchmark, we characterize the impact of capacity decision on the players' profit, i.e., the supplier's profit may be always significantly increased while the retailer's profit is only increased when the capacity is underestimated in the benchmark model. Further, we demonstrate that the integration of capacity decision can also significantly reduce the profit loss caused by double marginalization. Finally, we find that the revenue-sharing and two-part tariff contracts cannot coordinate the decentralized channel. Instead, we propose a franchise contract with a contingent rebate that can achieve channel coordination and a win-win outcome. (C) 2015 Elsevier B.V. All rights reserved.