Strategic Capacity Investment Under Uncertainty with Volume Flexibility

CentER Discussion Paper Series No. 2017-019

60 Pages Posted: 29 Mar 2017

See all articles by Xingang Wen

Xingang Wen

Tilburg University - Center for Economic Research (CentER)

Date Written: March 28, 2017

Abstract

This article considers investment decisions in an uncertain and competitive framework, with a first investor, the leader, always producing up to full capacity and a second investor, the follower, capable of adjusting output levels within the constraint of installed capacity. Both firms need to decide on the investment timing and the investment capacity levels. The main findings are as follows. Compared to a situation where the follower always produces up to full capacity, the leader has a larger incentive to accommodate a flexible follower. This is because the leader also benefits from the follower's volume flexibility. Due to the first mover advantage, the leader's value is higher than the follower's value, despite the follower's technological advantage in flexibility.

Keywords: Investment under Uncertainty, Volume Flexibility, Entry Deterrence/Accommodation, Capacity Choice, Duopoly

JEL Classification: E22, C73, D81

Suggested Citation

Wen, Xingang, Strategic Capacity Investment Under Uncertainty with Volume Flexibility (March 28, 2017). CentER Discussion Paper Series No. 2017-019, Available at SSRN: https://ssrn.com/abstract=2942060 or http://dx.doi.org/10.2139/ssrn.2942060

Xingang Wen (Contact Author)

Tilburg University - Center for Economic Research (CentER) ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands

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