On the role of demand and strategic uncertainty in capacity investment and disinvestment dynamics
نویسندگان
چکیده
In oligopolistic industries firms face at least two types of uncertainty. First, there is uncertainty about the evolution of demand and possibly also production technology. This type of uncertainty is typically exogenous to the industry. Second, there is uncertainty that emerges endogenously from the strategic decisions of firms. This strategic uncertainty often arises because a firm does not know the exact cost structure of its rivals and therefore cannot perfectly predict their decisions. It matters because a firm’s decision regarding capacity addition and withdrawal, say, has both an immediate impact on the profitability of its rivals and the potential to shape the evolution of the industry for years to come. In practice demand uncertainty and strategic uncertainty are important, and the strategic management literature on capacity decisions exhorts managers to think carefully about both. For example, in his classic work Competitive Strategy, Michael Porter writes: “Because capacity additions can involve lead times measured in years and capacity is often long lasting, capacity decisions require the firm to commit resources based on expectations about conditions far into the future. Two types of expectations are crucial: those about future demand and those about competitors’ behavior. The importance of the former in capacity decisions is obvious. Accurate expectations about competitors’ behavior is essential as well” (Porter 1980, p. 324). Highlighting how strategic ∗We thank Luis Cabral for helpful comments. Besanko and Doraszelski gratefully acknowledge financial support
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