Summary: The increasing competition in the market generally leads to fluctuations in the products demand. Such fluctuations pose a serious concern for the decision maker at each stage of the supply chain. Moreover, the capacity constraint at any level of the supply chain would make the situation more critical by elevating the bullwhip effect. The present article introduces a new allocation mechanism, i.e. Iterative Proportional Allocation (IPA), which instead of elevating, discourages the bullwhip effect. A comparative analysis of the proposed allocation mechanism with the policies defined in [C. K. Jaggi et al., Rev. Invest. Oper. 31, No. 3, 258–267 (2010; Zbl 1314.90008)] has been provided to explain the bottlenecks of existing policies. It has been established numerically, that application of IPA is beneficial for both retailers as well as suppliers, as the combined profit (loss) of all the retailers increases (decreases) and subsequently, minimizes the bullwhip effect of the supplier. We have incorporated the concept of Product Fill Rate (PFR) through which it is shown that IPA gives better results as compared to other allocation mechanisms.