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Abstract and Applied Analysis
Volume 2014 (2014), Article ID 801862, 9 pages
http://dx.doi.org/10.1155/2014/801862
Research Article

Investment Timing and Capacity Choice under Uncertainty

School of Finance, Chongqing Technology and Business University, Chongqing 400067, China

Received 10 January 2014; Revised 22 February 2014; Accepted 23 February 2014; Published 27 March 2014

Academic Editor: Qun Lin

Copyright © 2014 Xiumei Lv et al. This is an open access article distributed under the Creative Commons Attribution License, which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited.

Abstract

This paper examines strategic investment between two firms that compete not only for investment timing but also for capacity under stochastic market demand. The value functions of real option for the follower, the dominant leader, and the preemptive leader are derived and their investment decisions are investigated. It finds that both firms will delay investment and the delayed margin of the follower will surpass that of the leader under greater uncertainty. Furthermore, both firms will provide more outputs in the face of increasing uncertainty and the growth rate of the follower’s capacity will exceed that of the leader’s. In addition, this paper finds that the follower will end up with a larger capacity than the leader.