Title
Dedicated vs product flexible production technology : strategic capacity investment choice
Author
Faculty/Department
Faculty of Applied Economics
Publication type
article
Publication
Amsterdam ,
Subject
Economics
Mathematics
Source (journal)
European journal of operational research. - Amsterdam
Volume/pages
244(2015) :1 , p. 141-152
ISSN
0377-2217
ISI
000352667900014
Carrier
E
Target language
English (eng)
Full text (Publishers DOI)
Affiliation
University of Antwerp
Abstract
This paper studies the optimal investment strategies of an incumbent and a potential entrant that can both choose between a product flexible and dedicated technology, in a two-product market characterized by uncertain demand. The product flexible production technology has certain advantages, especially when the economic environment is uncertain. On the other hand, the dedicated production technology allows a firm to commit to production quantities. This gives strategic advantages, which can outweigh the 'value of flexibility'. It turns out that both firms prefer, for some scenarios, the dedicated production technology. However, we find that in a game with sequential technology choices, both firms investing dedicated, will not be an equilibrium. Especially when the economic environment is more uncertain, the incumbent overinvests in product flexible capacity to force the entrant to choose the dedicated technology. Then, the incumbent is the only firm with the product flexible production technology, which results in a high payoff. (C) 2015 Elsevier B.V. All rights reserved.
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