Recent studies suggest that pericytes around capillaries are contractile and able to alter the diameter of capillaries. To investigate the effects of capillary dilation on network dynamics, we performed simulations in artificial capillary networks of different sizes and complexities. The unequal partition of hematocrit at diverging bifurcations was modeled by assuming that each red blood cell (RBC) enters the branch with the faster instantaneous flow. Network simulations with and without RBCs were performed to investigate the effect of local dilations. The results showed that the increase in flow rate due to capillary dilation was less when the effects of RBCs are included. For bifurcations with sufficient RBCs in the parent vessel and nearly equal flows in the branches, the flow rate in the dilated branch did not increase. Instead, a self-regulation of flow was observed due to accumulation of RBCs in the dilated capillary. A parametric study was performed to examine the dependence on initial capillary diameter, dilation factor, and tube hematocrit. Furthermore, the conditions needed for an efficient self-regulation mechanism are discussed. The results support the hypothesis that RBCs play a significant role for the fluid dynamics in capillary networks and that it is crucial to consider the blood flow rate and the distribution of RBCs to understand the supply of oxygen in the vasculature. Furthermore, our results suggest that capillary dilation/constriction offers the potential of being an efficient mechanism to alter the distribution of RBCs locally and hence could be important for the local regulation of oxygen delivery.