Strategic Investment and Market Integration

to establish one or several plants.

In this game a multi-market incumbent can choose a multinational or export strategy to deter
entry. The multinational strategy requires less total capacity, while the export strategy requires
fewer plants. For some parameter values the multinational strategy is a more profitable strategy
to deter entry, for other values the export strategy is more profitable.

However, if the firms must incur a firm-specific cost, F, as well as plant-specific costs, G,
the current specification adds a new dimension to the problem. The firm-specific cost results in
economies of scale at the firm level and the plant-specifc cost in economies of scale at the plant
level. An entrant can use these assets in all markets, which makes single-market entry less profitable
compared to multi-market entry. Hence, single-market entry can be a strictly dominated strategy.
But this is not the case in all situations. If scale-economies at the firm and plant level are not too
large, the potential entrant will consider single-market entry rather than multi-market entry.

(iii) Mergers

An international merger is a union of assets from two firms previously active in two distinct
geographic markets. The multi-market model in this paper can be used for analyzing the effect of
these types of mergers.

Consider a situation where two firms have separately entered two local markets and successfully
deterred further entry. Each firm is active in one market only. Local production is associated with
a fixed cost, G. If the firms choose to merge, they will reduce their fixed costs. If capacity can be
used in all markets, the merged firm is obliged to install more capacity and expand its output to
successfully deter entry in the post-merger equilibrium. If the firm cannot expand its capacity to
deter entry, the result is local entry in one of the markets. In both cases, production is expanded
and the monopoly distortion is reduced. Hence, the merger is clearly pro-competitive.

9 Conclusions

Multi-market competition without market commitment makes the incumbent’s possibilities to
exploit first-mover advantages more difficult. A firm’s opportunity in one market influences its

21

<<   19   20   21   22   23   24   25   >>

More intriguing information