Strategic Capacity Investment Under uncertainty

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Abstract

Abstract: This paper considers investment decisions within an uncertain dynamic and competitive framework. Each investment decision involves to determine the timing and the capacity level. In this way we extend the main bulk of the real options theory where the capacity level is given. We consider a monopoly setting as well as a duopoly setting. Our main results are the following. In the duopoly setting we provide a fully dynamic analysis of entry deterrence/accommodation strategies. We find that the first investor overinvests in capacity in order to delay entry of the second investor. In very uncertain economic environments the first investor always ends up being the largest firm in the market. If uncertainty is moderately present, a reduced value of waiting implies that the preemption mechanism forces the first investor to invest so soon that a large capacity cannot be afforded. Then it will eventually end up with a capacity level being lower than the second investor.
Original languageEnglish
Place of PublicationTilburg
PublisherOperations research
Number of pages34
Volume2013-003
Publication statusPublished - 2013

Publication series

NameCentER Discussion Paper
Volume2013-003

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Keywords

  • Investment under Uncertainty
  • Entry Deterrence/Accomodation
  • Duopoly
  • Capacity Choice

Cite this

Huisman, K. J. M., & Kort, P. M. (2013). Strategic Capacity Investment Under uncertainty. (CentER Discussion Paper; Vol. 2013-003). Tilburg: Operations research.