I thank the senior editor, the associate editor, and the referees for their insightful suggestions, which helped improve this article significantly.
Capacity Investment Under Responsive Pricing: Implications of Market Entry Choice*
Article first published online: 14 FEB 2012
© 2012 The Author Decision Sciences Journal © 2012 Decision Sciences Institute
Volume 43, Issue 1, pages 107–140, February 2012
How to Cite
Wang, Y. (2012), Capacity Investment Under Responsive Pricing: Implications of Market Entry Choice. Decision Sciences, 43: 107–140. doi: 10.1111/j.1540-5915.2011.00337.x
- Issue published online: 14 FEB 2012
- Article first published online: 14 FEB 2012
- [Submitted: September 20, 2010. Revisions received: March 13, 2011; May 21, 2011. Accepted: June 8, 2011.]
- Facilities Planning;
- Market Entry;
- Resource Flexibility;
- Responsive Pricing
We consider a manufacturer’s new market entry problem when it already has some established facility in its existing market. We consider two common market entry strategies: the export strategy and the foreign direct investment (FDI) strategy. In the export strategy the firm increases the capacity at its existing facility and subsequently allocates the output to the existing and the new market dynamically, depending on realized market conditions. The export strategy is a flexible strategy. In the FDI strategy, the firm invests in a dedicated capacity to serve the new market only. The FDI strategy is a (partially) dedicated strategy. We study these two strategies from a planning perspective, that is, how the firm’s strategy choice influences the optimal capacity levels. We find that the firm’s strategy choice can significantly impact the optimal capacity investment levels. We prove, for example, that the firm may enter the new market in the export strategy but not in the FDI strategy, even if the capacity investment cost is identical in the existing and the new market. In addition, we prove that the firm may invest a strictly higher capacity level in the export strategy than that in the FDI strategy. We also prove that new market entry in the FDI strategy may strictly decrease the firm’s supply to its existing market but this is not so in the export strategy, and hence policy makers should carefully consider the implications of trade regulations on firms’ market entry choices.