Strategic Investment and Market Integration

total capacity to local markets. Instead, capacity can be redistributed between different markets,
without additional costs. The first three cases differ with respect to potential competition and
timing.

In the first version of the multi-market game, analyzed in section 3, an incumbent meets sequen-
tial competition from local entrants. The sequential structure is plausible when firms independently
try to specify a certain product. They consider entry as soon as the product specification is correct
and they have raised enough money for local production. This first happens to firm one, then to
firm two etc. In this first version of the game, it is assumed that potential entrants only consider
local entry. One rational for this assumption is that the firm has to succeed in its domestic market
before it can raise money for multi-market expansion.

In the second version of the multi-market game, analyzed in section 4, the incumbent faces
simultaneous competition from local entrants. The simultaneous structure arises when the in-
cumbent owns a global patent expiring at the same time in all local markets. In this case, local
competitors already have a correct specification of the product. As soon as the patent expires, they
immediately consider entry in the local market. In the second version of the game, the assumption
that potential competitors only consider local entry is maintained.

In the third version of the multi-market game, analyzed in section 5, the incumbent faces simul-
taneous competition from a single multi-market competitor in all markets. This market structure
is plausible if the first competitor to finish the process of product specification immediately con-
siders a multi-market strategy, or if a global patent expires in all markets simultaneously and the
potential entrant can raise enough money for multi-market entry.

After the analysis of the first three versions of the multi-market game, the assumptions about
the incumbent’s possibilities to restrict competition are changed. In the fourth version of the game,
analyzed in section 6, the incumbent is allowed to assign parts of its capacity to local markets.
The choice of a certain production organization is a trade-off between the cost of entry-deterrence
with the multi-market capacity and the cost of market assignments.

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