Strategic Investment and Market Integration



4 Simultaneous Competition from Local Entrants

Consider a market situation similar to the first version of the multi-market game. In this ver-
sion, the incumbent owns a global patent expiring at the same time in all markets and potential
competitors can enter the local markets simultaneously. If a potential competitor challenges the
established
firm in a local market, the incumbent and the entrant choose outputs simultaneously
and the market will clear as duopoly. If the potential entrant stays out, monopoly will prevail.

The rules of the second version of the multi-market game are defined as follows. The game, Γ^,
has
n +1 players, player m and player 1,..., n (n 1). The game is played over two periods. In the
first period, the incumbent must choose a pre-entry capacity, к. At the beginning of the second
period, player
t = 1,...,n must simultaneously decide to enter or stay out of market t. Player
t’s decision is immediately announced to all other players. If player t decides to enter market t,
then the incumbent and the entrant choose x'"λ and
xf simultaneously. At the end of the second
period, all markets clear and payo
ffs are distributed to the incumbent and players 1, ...,n. Player
m’s payo
ff is given by eq. (1) and player t’s payoff by eq. (2).

The analysis in the second version of the multi-market game is similar to the analysis in the
first version. If players compete in strategic substitutes and the necessary deterrence condition
is satis
fied, entry can also be deterred in the second version of the game. To deter entry, the
established
firm must install кnx in the n-market game.

Consider, for instance, the two-market case. There are four subgames in the last stage of the
two-market game. In two of the four subgames, one potential competitor enters, and the other
stays out. To see why twice the single market deterrence capacity does not su
ffice, consider the
pro
fit maximizing conditions when к = 2χ:

Xπ               Xπ

χx1 (xfi, f (χψ)) = — (2χ - x^ 0)                       (7)

Strategic substitutes imply that the output in the duopoly market is strictly lower than the deter-
rence level, i.e.
.x"f' < χ. Thus, entry would not be deterred.

Proposition 4 If D and S are satisfied in the second version of the n-market game, Γ^l, then the
incumbent installs capacity
nxkχ.x + (n 1) χ0 to deter entry.

11



More intriguing information

1. The name is absent
2. Social Cohesion as a Real-life Phenomenon: Exploring the Validity of the Universalist and Particularist Perspectives
3. Human Rights Violations by the Executive: Complicity of the Judiciary in Cameroon?
4. Subduing High Inflation in Romania. How to Better Monetary and Exchange Rate Mechanisms?
5. Reform of the EU Sugar Regime: Impacts on Sugar Production in Ireland
6. Publication of Foreign Exchange Statistics by the Central Bank of Chile
7. Commuting in multinodal urban systems: An empirical comparison of three alternative models
8. Großhandel: Steigende Umsätze und schwungvolle Investitionsdynamik
9. BARRIERS TO EFFICIENCY AND THE PRIVATIZATION OF TOWNSHIP-VILLAGE ENTERPRISES
10. The Dictator and the Parties A Study on Policy Co-operation in Mineral Economies