Supply chain investment and de-escalation of capacity competition

Abstract

Research on capacity competition has examined the conditions under which early mover’s capacity investment might preempt, or instead escalate, latecomers’ capacity investment. In contrast, this paper investigates the role of early mover’s supply chain investment in de-escalating subsequent capacity competition, in a setting where competing firms enter a new location to establish new production sites. Supply chain investment refers to investment in developing and integrating with supply chain partners in the location where a production site resides. We build a two-stage model where an early mover and a latecomer first make their investment decisions sequentially, and next choose either their output level (Cournot competition) or pricing (Bertrand competition) simultaneously. Predictions derived from the analytical model is then tested using data on a set of leading IT manufacturers. Both analytical and empirical results suggest that latecomer’s capacity investment increases correspondingly with early mover’s capacity investment, but decreases with early mover’s supply chain investment.