Production Capacity Investment with Data Updates

We model the capacity investment problem faced by pharmaceutical firms and other firms with long and risky product development cycles. These firms must balance two conflicting objectives: on one hand, the delay in scaling-up production once the product is approved must be minimized, and on the other hand, the risk of investing in ultimately unused capacity must be minimized. We develop a stylized model of this type of capacity investment problem, where the firm re-evaluates its capacity investment strategy as information about the potential success of the product is continually updated (for example, via clinical trial results in the case of the pharmaceutical industry). We identify settings in which by continually reviewing the building strategy, the firm can substantially reduce both the delay of the commercial launch of the new product, and the risk of lost investment.