however, be noted that per-market prohts are less affected by unilateral entry in a single market,
if the number of markets is large.
6 Market Commitments
In this section, I extend the analysis and let the incumbent first determine the organization of its
production, either with a global capacity, referred to as the global strategy, or with a combination
of a global capacity and local capacities that can be used in specific markets only, referred to
as the local strategy. The local strategy can be regarded as a vertically integrated production
process, where the production process is split into two vertical stages. It will be shown that if
sufficient conditions apply, then local capacities can be assigned to local markets and successfully
deter entry.
We study a three-stage game similar to the two-stage game in the previous sections. In the
first stage, the multi-market firm can choose a global or a local strategy. The local strategy, i.e.
assigning a local capacity to each local market, is associated with an extra fixed cost G in each
market.
We can now describe the rules of the fourth version of the game. The game, Γ^, has two players,
player m and player e. The game is played over a sequence of three stages. In the first stage, the
incumbent must begin by choosing a local or global strategy. In the second stage, the incumbent
must choose local capacities in each market, kt, and a multi-market capacity, k. Unlike the global
capacity, it is assumed that local capacities can be increased in the third stage. All decisions of
the established firm is immediately announced to the potential competitor. At the beginning of
the third stage, player e must decide to enter or stay out in n separate markets called t = 1,..., n.
Player e’s decision is announced to the incumbent. If player e decides to enter market t, player
m and player e will choose .r"'l" and xf simultaneously. Finally, all markets clear and payoffs are
distributed to player m and player e.
If the incumbent chooses a local strategy, the unit-cost of local capacity is c↑ > 0, and the
unit-cost of multi-market capacity is c2 > 0. Moreover, each local assignment is associated with
a fixed cost G > 0. If the incumbent chooses a global strategy, the cost of capacity is c. For
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