for t = 2,..., n. The first part of the LHS is equal to zero and from (C), the second part is positive.
Thus the inequality holds. Equal parts of the total capacity should be assigned to each market,
i.e. kn∕n. x deters entry in market t, hence nx is enough to deter entry in all markets. ■
The incumbent installs strictly less capacity with market commitments compared to the capac-
ity needed to deter entry, if the capacity is not assigned to specific markets. The difference in the
established firm’s profit, if C is satisfied in ГП, between the local and the global strategy is called
the commitment premium, denoted ∆π. Working backwards, the multi-market firm will choose a
local strategy if the commitment premium minus the cost of assignment is positive.
Proposition 8 If C is satisfied in ГП the multi-market firm will choose a local strategy to deter
entry i.f.f. ∆π — nG > 0.
Proof. Follows immediately from the definition of the commitment premium and the cost of a
local strategy. ■
It follows from this proposition that a local strategy is more likely, the lower the assignment
cost. Thus, the organization of production within the multi-market firm is primarily determined
by the relationship between economies of scale at the local level and the commitment premium.
Another important issue is what factors determine the incumbent’s opportunities to make
market commitments. These factors can be exogenous, e.g. different national standards or trade
regulations. A more interesting case, however, is when the incumbent chooses to induce market
segmentation endogenously.
First, firms can bundle their tradable products with locally produced and consumed nontrad-
ables, e.g. services. If the product cannot be used without local services, the capacity is assigned
to the local market provided that the marginal cost to expand the service capacity is sufficiently
high. In this case, a global strategy would correspond to the manufacturing of a sophisticated
product, which can be used without services. A local strategy, on the other hand, would be to
produce a less sophisticated product which must be consumed with some local support or services.
Second, strategic market segmentation can occur in a horizontally differentiated product space.
If consumers in the local markets have preferences for local products, capacities can be assigned to
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