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firm failure significantly impacts the dynamics of competition involving start-ups. Key words: capacity; competition; uncertainty; investment timing; game theory History: Received September 11, 2009; accepted December 28, 2010, by Yossi Aviv, operations management.

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MANAGEMENT SCIENCEVol. 57, No. 4, April 2011, pp. 763777issn 0025-1909 _ eissn 1526-5501 _ 11 _ 5704 _ 0763informsdoi 10.1287/mnsc.1110.13092011 INFORMSCapacity Investment Timing by Start-ups andEstablished Firms in New MarketsRobert SwinneyGraduate School of Business, Stanford University, Stanford, California 94305, swinney@stanford.eduGrard P. CachonThe Wharton School, University of Pennsylvania, Philadelphia, Pennsylvania 19104, cachon@wharton.upenn.eduSerguei NetessineINSEAD, 77305 Fontainebleau, France, serguei.netessine@insead.eduWe analyze the competitive capacity investment timing decisions of both established firms and start-upsentering new markets, which have a high degree of demand uncertainty. Firms may invest in capacityearly (when uncertainty is high) or late (when uncertainty has been resolved), possibly at different costs. Establishedfirms choose an investment timing and capacity level to maximize expected profits, whereas start-upsmake those choices to maximize the probability of survival. When a start-up competes against an establishedfirm, we find that when demand uncertainty is high and costs do not decline too severely over time, the start-uptakes a leadership role and invests first in capacity, whereas the established firm follows; by contrast, when twoestablished firms compete in an otherwise identical game, both firms invest late. We conclude that the threat offirm failure significantly impacts the dynamics of competit

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