Research Repository

Competition through capacity investment under asymmetric existing capacities and costs

Yang, Shu-Jung Sunny and Anderson, Edward James (2014) 'Competition through capacity investment under asymmetric existing capacities and costs.' European Journal of Operational Research, 237 (1). pp. 217-230. ISSN 0377-2217

[img]
Preview
Text
SSRN-id2442244.pdf - Accepted Version

Download (3MB) | Preview

Abstract

This paper discusses the way that different operational characteristics including existing capacity, scale economies, and production policy have an important influence on the capacity outcomes when firms compete in the market place. We formulate a game-theoretical model where each firm has an existing capacity and faces both fixed and variable costs in purchasing additional capacity. Specifically, the firms simultaneously (or sequentially) make their expansion decisions, and then simultaneously decide their production decisions with these outputs being capacity constrained. We also compare our results with cases where production has to match capacity. By characterizing the firms’ capacity and production choices in equilibrium, our analysis shows that the operational factors play a crucial role in determining what happens. The modeling and analysis in the paper gives insight into the way that the ability to use less production capacity than has been built will undermine the commitment value of existing capacity. If a commitment to full production is not possible, sinking operational costs can enable a firm to keep some preemptive advantage. We also show that the existence of fixed costs can introduce cases where there are either no pure strategy equilibrium or multiple equilibria. The managerial implications of our analysis are noted in the discussion. Our central contribution in this paper is the innovative integration of the strategic analysis of capacity expansion and well-known (s,S)(s,S) policy in operations and supply chain theory

Item Type: Article
Uncontrolled Keywords: Capacity expansion; Existing capacity; Fixed cost; Lead time; Game theory; Competitive strategy
Subjects: H Social Sciences > HF Commerce
Divisions: Faculty of Social Sciences > Essex Business School
Depositing User: Users 161 not found.
Date Deposited: 24 Oct 2014 15:04
Last Modified: 24 Oct 2014 15:04
URI: http://repository.essex.ac.uk/id/eprint/11170

Actions (login required)

View Item View Item