Abstract: Under demand uncertainty, the flexibility of quantity decision is descrided by production capacity, the Cournot model is used to build a 2-firm game model that describes the strategic (quantity) competition between those two firms, and the equilibrium is emploged to establish a functional relationship between flexibility and competitive advantage. The results obtained by comparative statics analysis show that (1) it other things equal, a firm’s relative competitive advantage increases with its production capacity, but decreases with its opponent’s production capacity; (2) the firm with higher production capacity will achieve higher absolute competitive advantage. These two results indicate that competitive advantage is positively related to flexibility. This conclusion, to some degree, clarifies the problem of the ambiguity of the relationship between flexibility and competitive advantage in strategic management literature, and extends the findings in the studies based on individual rational decision-making to a competitive context where strategic interdependence exists due to the introduction of competitive strategic interaction.

Key words: production capacity, competitive advantage, flexibility, Cournot model