Financial intermediation and entry-deterrence

Journal of Banking & Finance, 1992

SSRN Electronic Journal

We show that competing firms relax overall competition by lowering future barriers to entry. We illustrate our findings in a two-period model with adverse selection where banks strategically commit to disclose borrower information. By doing this, they invite rivals to enter their market. Disclosure of borrower information increases an entrant's second-period profits. This dampens competition for serving the first-period market.

International Journal of …, 2003

We study models of signaling and entry deterrence when the incumbent firm is subject to agency restraints and the principal does not have the relevant information to signal to the potential entrant. The informational implications of the dynamic agency relationship are fully identified. A characterization of optimal contracts is given for both the case of deterministic markets as well as stochastic markets. Moreover, the differences between whether incentive contracts are observable or hidden are presented.

Journal of Money, Credit and Banking, 2007

Using a sample for 1972-2002 with over 10,000 bank entries into local markets, we find a market share advantage for early entrants. In particular, the earlier a bank enters, the larger is its market share relative to other banks, controlling for firm, market, and time effects, with a market share advantage for early movers between 1 and 15 percentage points, depending on the order of entry. The strongest early-mover advantage is for banks that were in our sample in 1972 and survive into the 1990s. Moreover, early entrants appear to have such hold in the market by strategically investing in larger branch networks. Even controlling for the potential survivorship bias, we find that a bank's share decreases by 0.1 percentage points for a change in its order of entry from nth to (n + 1)th. High growth markets show a smaller difference between late and early movers, consistent with a larger fraction of consumers yet to be locked in with a bank in these markets.

International Journal of Industrial Organization, 1988

Most models of entry deterrence through preemptive investment consider either a monopolist or a cartel. This suppresses an important question: how does threat of entry affect capital choices of several noncolluding incumbents. There are two opposing forces. Expanding capital to deter entry generates a public good to other incumbents, but also increases the expanding firm's share of market output. We address the trade off in a model of sequential entry with foresight, where in the first stage capital choices are made sequentially and in the second stage the output interaction is Cournot or competitive. Under competitive interaction, we prove that the first entrant either admits all other potential entrants or deters all-it never allows partial entry. Under Cournot, we find (using simultaneous) some rather surprising patterns: easier entry can make the first entrant's capital larger or smaller; the first entrant can be smaller than the second but is never less profitable; the first entrant's profit is always reduced by increased entry threat but profits of other entrants can be increased.

Southern Economic Journal, 2005

We examine free riding and underinvestment in noncooperative entry deterrence in the Gilbert and Vives (1986) model with differentiated products. Our analysis proves that for products that are differentiated enough, when both entry allowing and entry deterring equilibria coexist, the symmetric entry deterring equilibrium may Pareto dominate the entry equilibrium. Hence, "coordination failure" underinvestment in entry prevention can occur. However, as claimed, the overinvestment result of Gilbert and Vives remains robust to moderate amounts of product differentiation. We also show that coordination failure underinvestment arises in a wide variety of entry deterrence models and does not rely on assumptions regarding strategic substitutability or complementarity of precommitments. JEL Classification: L13 1. Introduction This paper reexamines the phenomenon of free riding in entry deterrence when established firms in an oligopoly are unable to coordinate their entry preventing activities. Previous authors (e.g., Bernheim 1984; Gilbert and Vives 1986; Waldman 1987, 1991; Appelbaum and Weber 1992) have highlighted the public good aspect of noncooperative entry prevention?if costly entry deterring actions are successfully undertaken by a proper subset of the incumbents, then incumbents outside of that subset cannot be excluded from the benefits of deterred entry. It is in this sense that entry deterrence acquires the nature of a public good. This observation has prompted previous researchers to raise the "free rider" question (with its associated welfare implications): Can there occur underinvestment in entry deterrence

Journal of Economic Dynamics and Control, 2016

This article studies strategic investment behavior of firms facing an uncertain demand in a duopoly setting. Firms choose both investment timing and the capacity level while facing additional uncertainty about market participants, which is introduced via the concept of hidden competition. We focus on the analysis of possible strategies of the market leader in terms of its capacity choice and on the influence of hidden competition on these strategies. We show that due to hidden competition the follower is more eager to invest. As a result the entry deterrence strategy of the leader becomes more costly and it can only be implemented for smaller market size, leaving additional room for entry accommodation. The leader has incentives to prevent entry of the hidden competitor stimulating simultaneous investment if the hidden firm has a large capacity, and has more incentives to apply entry deterrence in the complementary case of a small capacity of the hidden player. In the first case overinvestment aimed to deter the follower's entry does not occur for a wide range of parameters values.

Journal of Applied Economics, 2012

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IMF Working Papers, 2021

This paper develops a model where large financial intermediaries subject to systemic runs internalize the effect of their leverage on aggregate risk, returns and asset prices. Near the steady-state, they restrict leverage to avoid the risk of a run which gives rise to an accelerator effect. For large adverse shocks, the system enters a zone with high leverage and possibly runs. The length of time the system remains in this zone depends on the degree of concentration through a franchise value, price-drop and recapitalization channels. The speed of entry of new banks after a collapse has a stabilizing effect.

Journal of Banking & Finance, 2009

The Rosse-Panzar revenue test for competitive conditions in banking is based on observation of the impact on bank revenue of variation in factor input prices. We identify the implications for the H-statistic of misspecification bias in the revenue equation, arising when adjustment towards market equilibrium is partial and not instantaneous. In simulations, fixed effects estimation produces a measured H-statistic that is severely biased towards zero. Empirical results for the banking sectors of the Group of Seven (G7) countries corroborate our principal finding, that a dynamic formulation of the revenue equation is required for accurate identification of the H-statistic.