Abstract: This paper applies the real-option approach to study the capacity decision in supply chain management under perfect competitive markets. Through analyzing the value of capacity investment decision, we give some rules of the capacity decision with flexibility. We also analyze the influence of three main factors upon the investment decision, which include the property of market evolvement, investment cost, and out of stock cost. The results show that a more (less) risky market, a higher (lower) capacity investment cost, or a lower (higher) out of stock cost is likely to postpone (advance) the implementing of capacity expansion.