Strategic Investment and Market Integration

Step 5. If (D) holds with equality, i.e. x = x^m, then c)ττ (x^r'^l.x^c} ∕∂xψ = ∂π         ∕∂xψ^, and

the LHS is zero and, therefore, the entry-deterring capacity is к = x^m + (n — 1) χ^m.

Step 6. Working backwards to the first stage. Now, the incumbent capacity is к E (nx, x^m + (n — 1) x ],
where к is determined by equation (18). ■

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