Clientelization and fragmentation in backward agriculture: Forward induction and entry deterrence

This paper considers a case of Fragmented Duopoly (Basu and Bell, 1991) where firms have a captive segment each and compete in the remaining (contested) segment in a standard Cournot fashion. We study a two-stage game. In the first period the existing firm chooses the size of the captive segment (incurring some cost, of course) and then both the firms choose quantities to sell in the second stage. Given a small fixed cost (relevant to the contested segment), the second stage game has three possible equilibria (two corner and the interior one). These induce a proliferation of subgame perfect Nash equilibria in the whole game. We use a version of forward induction rationality to refine this set. We find the unique equilibrium, where the existing firm has monopoly over the entire market. Some applications and extensions are suggested.