Step 5. If (D) holds with equality, i.e. x = xm, then c)ττ (xr'l.xc} ∕∂xψ = ∂π ∕∂xψ, and
the LHS is zero and, therefore, the entry-deterring capacity is к = xm + (n — 1) χm.
Step 6. Working backwards to the first stage. Now, the incumbent capacity is к E (nx, xm + (n — 1) x ],
where к is determined by equation (18). ■
29
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