Capacity Investment Timing by Start-ups and Established Firms in New Markets

Robert Swinney (), Gérard P. Cachon () and Serguei Netessine ()
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Robert Swinney: Graduate School of Business, Stanford University, Stanford, California 94305
Gérard P. Cachon: The Wharton School, University of Pennsylvania, Philadelphia, Pennsylvania 19104
Serguei Netessine: INSEAD, 77305 Fontainebleau, France

Management Science, 2011, vol. 57, issue 4, 763-777

Abstract: We analyze the competitive capacity investment timing decisions of both established firms and start-ups entering new markets, which have a high degree of demand uncertainty. Firms may invest in capacity early (when uncertainty is high) or late (when uncertainty has been resolved), possibly at different costs. Established firms choose an investment timing and capacity level to maximize expected profits, whereas start-ups make those choices to maximize the probability of survival. When a start-up competes against an established firm, we find that when demand uncertainty is high and costs do not decline too severely over time, the start-up takes a leadership role and invests first in capacity, whereas the established firm follows; by contrast, when two established firms compete in an otherwise identical game, both firms invest late. We conclude that the threat of firm failure significantly impacts the dynamics of competition involving start-ups. This paper was accepted by Yossi Aviv, operations management.

Keywords: capacity; competition; uncertainty; investment timing; game theory (search for similar items in EconPapers)
Date: 2011
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Citations: View citations in EconPapers (51)

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Persistent link: https://EconPapers.repec.org/RePEc:inm:ormnsc:v:57:y:2011:i:4:p:763-777

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