Abstract
The bene fit of strategic commitment and the option value associated with ‡flexibility are jointly examined in two-period and continuous time models of investment. An optimal policy for a fi rst-mover involves splitting a discrete investment into two parts, with a fi rst increment that positions the firm strategically and a contingent remainder that accounts for both uncertainty and simultaneous competition. The benefi t of commitment is shown to generally outweigh the opportunity cost of forgone fl‡exibility. Thus, a first-mover will seek to sink a part of its capacity cost early knowing either that it may subsequently adjust capacity if economic conditions turn out to be favorable or that its partial investment will enable it to preempt a potential rival more effectively.