This paper was originally presented at the CEFI Conference on ‘Imperfect Competition and International Trade', Aix-en-Provence (France), June 18–19, 1987. We wish to thank Avinash Dixit, who gave the initial impetus to this research. We are also grateful to Alexis Jacquemin and Paul Krugman for valuable discussion and comments. We thank also the French ‘Commissariat au Plan' for financial support and the ‘Chambre Syndicale des Constructeurs Automobiles' (CSCA) for gracious assistance.