Strategic Capacity Investment under Uncertainty with Volume Flexibility
Abstract: This paper considers investment decisions in an uncertain and competitive framework, with the leader always producing up to full capacity and 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. The dedicated leader would accommodate rather than to deter the entry of a flexible follower. This is because in the accommodation case, the dedicated leader 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.