Investment timing and capacity decisions with time-to-build in a duopoly market

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Abstract

In this study, we investigate optimal investment timing and capacity decisions in the presence of time-to-build and competition. Due to uncertain time-to-build, a leader, who invests first, may have its product enter the market after a follower's. We show that a dominated firm with the longer time-to-build can become a leader by making the investment earlier than a dominant firm with shorter investment lags. The leader's capacity choice increases with the dominated firm's time-to-build, even if the dominated entity is the leader. This finding is consistent with the observation in the electric vehicles market in which a relatively new firm with little experience of mass production makes aggressive investment early on, while the biggest carmakers capable of mass production are timing their investment. With a welfare-maximizing policy, however, the dominant firm with the shorter time-to-build always becomes the leader. There is a significant loss of social welfare with the dominated firm being the leader, and the loss increases with the asymmetry of time-to-build.

Original languageEnglish
Article number104028
JournalJournal of Economic Dynamics and Control
Volume122
DOIs
Publication statusPublished - Jan 2021

Keywords

  • Duopoly market
  • Investment capacity
  • Investment lags
  • Real options
  • Time-to-build

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