Porter and Spence (1982) pointed out that firms may want to overinvest in production capacity to show a commitment to maintain their market share to competitors. In their model, excess plant capacity would not be a positive net present value project if the cash flow calculations take the competitors’ actions as given. However, since competitors are less likely to enter a market when the incumbent firm has excess capacity, the added capacity may be worthwhile even if it is never used. Comment on whether this strategic consideration should be taken into account when analyzing an investment project.

AppendixLO1