This paper examines a dynamic incumbent-entrant framework with stochastic evolution of the (inverse)

demand, in which both the optimal timing of the investments and the capacity choices are explicitly

considered. We find that the incumbent invests earlier than the entrant and that entry deterrence is

achieved through timing rather than through overinvestment. This is because the incumbent invests

earlier and in a smaller amount compared to a scenario without potential entry. If, on the other hand,

the capacity size is exogenously given, the investment order changes and the entrant invests before the

incumbent does.