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The timing of capacity investment with lead times: when do firms act in unison?

The timing of capacity investment with lead times: when do firms act in unison?
The timing of capacity investment with lead times: when do firms act in unison?
We study competitive capacity investment for the emergence of a new market. Firms may invest either in capacity leading demand or in capacity lagging demand at different costs. We show how the lead time and other operational factors including volume flexibility, existing capacity, and demand uncertainty impact equilibrium outcomes. Our results indicate that a type of bandwagon behavior is the most likely equilibrium outcome: if both firms are going to invest, then they are most likely to act in unison. Contrary to much received wisdom, we show that leader–follower behavior is very uncommon in equilibrium where firms do not have volume flexibility, and will not occur at all if lead times are sufficiently short. On the other hand, if there is volume flexibility in production, then the likelihood of this sequential investment behavior increases. Our findings underscore the importance of operational characteristics in determining the competitive dynamics of capacity investment timing.
capacity investment timing, lead time, volume flexibility, existing capacity, operations strategy
1059-1478
21-41
Anderson, Edward James
ee68a677-15a2-41f2-a8e9-708b18e11af2
Yang, Shu-Jung Sunny
b02a7cdb-58d8-40dc-a674-1aa32a85e3e8
Anderson, Edward James
ee68a677-15a2-41f2-a8e9-708b18e11af2
Yang, Shu-Jung Sunny
b02a7cdb-58d8-40dc-a674-1aa32a85e3e8

Anderson, Edward James and Yang, Shu-Jung Sunny (2015) The timing of capacity investment with lead times: when do firms act in unison? Production and Operations Management, 24 (1), 21-41. (doi:10.1111/poms.12204).

Record type: Article

Abstract

We study competitive capacity investment for the emergence of a new market. Firms may invest either in capacity leading demand or in capacity lagging demand at different costs. We show how the lead time and other operational factors including volume flexibility, existing capacity, and demand uncertainty impact equilibrium outcomes. Our results indicate that a type of bandwagon behavior is the most likely equilibrium outcome: if both firms are going to invest, then they are most likely to act in unison. Contrary to much received wisdom, we show that leader–follower behavior is very uncommon in equilibrium where firms do not have volume flexibility, and will not occur at all if lead times are sufficiently short. On the other hand, if there is volume flexibility in production, then the likelihood of this sequential investment behavior increases. Our findings underscore the importance of operational characteristics in determining the competitive dynamics of capacity investment timing.

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More information

e-pub ahead of print date: March 2014
Published date: January 2015
Keywords: capacity investment timing, lead time, volume flexibility, existing capacity, operations strategy
Organisations: Southampton Business School

Identifiers

Local EPrints ID: 377510
URI: https://eprints.soton.ac.uk/id/eprint/377510
ISSN: 1059-1478
PURE UUID: 3c344594-2d61-4370-a69b-96c064f88fb9

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Date deposited: 16 Jun 2015 08:30
Last modified: 17 Jul 2017 20:59

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Contributors

Author: Edward James Anderson
Author: Shu-Jung Sunny Yang

University divisions

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