Competitive Market Selection With Timing and Capacity Decisions

Abstract

Firms faced with large capacity investment decision often face complex decisions: when to invest, which market to pursue, and how much to invest into those markets, all of which have strategic implications in competitive environments. We study a setting where two firms with symmetric costs are each considering capacity investments into one of two alternative projects, one targeting an emerging market and the other a mature market. Demand for the emerging market is uncertain and may expand through firms' market entry (positive diffusion effects), while demand for the mature market is known with certainty and cannot expand. Our analysis reveals that the existence of multiple investment opportunities may induce firms to delay their investment even in the absence of demand uncertainty, and that high diffusion effects coupled with low demand uncertainty can drive firms to invest early even if both firms could increase returns by delaying their investment. The analysis further uncovers a key ratio (a function of the average demand and costs of each market) that can help managers make timely decisions and focus their resources early. In an extension, we consider an alternative sequence of decisions.