Strategic Capacity Investment Under Uncertainty

Contrary to most of the papers in the literature of investment under uncertainty we study models that not only capture the timing, but also the size of the investment. We consider a monopoly setting as well as a duopoly setting and compare the results with the standard models in which the firms do not have the capacity choice. Our main results are the following. First, for low uncertainty values the follower chooses a higher capacity than the leader and for high uncertainty values the leader chooses a higher capacity. Second, compared to the model without capacity choice, the monopolist and the follower invest later in a higher capacity for higher values of uncertainty. However, the leader will invest earlier in a higher capacity for higher values of uncertainty. The reverse results apply for lower values of uncertainty.