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Strategic capacity expansion under a potential entry threat

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  • Kamoto, Shinsuke

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.

Suggested Citation

  • Kamoto, Shinsuke, 2015. "Strategic capacity expansion under a potential entry threat," International Review of Economics & Finance, Elsevier, vol. 38(C), pages 157-177.
    • Handle: RePEc:eee:reveco:v:38:y:2015:i:c:p:157-177
    DOI: 10.1016/j.iref.2015.01.006
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    1. Lu, Jin-Ray & Hwang, Chih-Chiang & Lin, Chien-Yi, 2016. "Do shareholders appreciate capital investment policies of corporations?," International Review of Economics & Finance, Elsevier, vol. 43(C), pages 344-353.

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    More about this item

    Keywords

    Real options; Strategic incentive; Capacity expansion;
    All these keywords.

    JEL classification:

    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection

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