Strategic capacity expansion under a potential entry threat

Shinsuke Kamoto

International Review of Economics & Finance, 2015, vol. 38, issue C, 157-177

Abstract: This paper examines strategic investment decisions on capacity expansion in the presence of a potential entry threat. The model derives an equilibrium investment strategy on expansion thresholds and scales and evaluates the strategic value of the capacity expansion. It demonstrates that an incumbent firm expands its production capacity by strategic incentive to deter a potential competitor's market entry and prolong its period of monopoly. The results suggest that the strategic value of the expansion is high enough to induce the incumbent firm to undertake the capacity expansion that generates negative cash flows in the future as a stand-alone project.

Keywords: Real options; Strategic incentive; Capacity expansion (search for similar items in EconPapers)
JEL-codes: D21 D43 G13 G31 (search for similar items in EconPapers)
Date: 2015
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S105905601500012X
Full text for ScienceDirect subscribers only

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:reveco:v:38:y:2015:i:c:p:157-177

DOI: 10.1016/j.iref.2015.01.006

Access Statistics for this article

International Review of Economics & Finance is currently edited by H. Beladi and C. Chen

More articles in International Review of Economics & Finance from Elsevier
Bibliographic data for series maintained by Catherine Liu ().