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Strategic Experimentation in Financial Intermediation with Threat of Entry

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  • Neelam Jain
  • Thomas Jeitschko
  • Leonard Mirman

Abstract

We study how the threat of entry affects financial contracting between an incumbent firm and a bank, in a stochastic and dynamic environment. Contracts are short term and public. We determine the effects of the first period financial contract on the first period outputs in face of the threat of entry. Specifically, it is shown that the distance between first period outputs is increased due to potential entry. This is due to two underlying effects: first, the threat of entry reduces the signal dampening effect and thus the surplus left to the low cost incumbent is reduced. Second, learning is more valuable as it decreases the probability of entry. Indeed, experimentation takes on a strategic form, since the bank must take into account the impact of the possible game on its expected profits. This work integrates the agency problem between a firm and its financial intermediary with the issue of entry-deterrence under uncertainty. Copyright Kluwer Academic Publishers 2002

Suggested Citation

  • Neelam Jain & Thomas Jeitschko & Leonard Mirman, 2002. "Strategic Experimentation in Financial Intermediation with Threat of Entry," Annals of Operations Research, Springer, vol. 114(1), pages 203-227, August.
    • Handle: RePEc:spr:annopr:v:114:y:2002:i:1:p:203-227:10.1023/a:1021070405196
    DOI: 10.1023/A:1021070405196
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    Cited by:

    1. Jain, N., 2016. "Financing and Mode of Entry in Foreign Markets," Working Papers 15/16, Department of Economics, City University London.
    2. Neelam Jain, 2009. "Lender learning and entry under demand uncertainty," Economics Bulletin, AccessEcon, vol. 29(1), pages 100-107.
    3. Jain, Neelam, 2011. "Entry deterrence and experimentation under demand uncertainty," International Journal of Industrial Organization, Elsevier, vol. 29(4), pages 464-472, July.
    4. Leonard J. Mirman & Thomas Jeitschko & Neelam Jain, 2001. "Financial Intermediation and Entry-Deterrence: A survey," Economics Bulletin, AccessEcon, vol. 12(1), pages 1-13.
    5. Neelam Jain & Leonard Mirman, 2011. "Lender learning and entry under general demand uncertainty," Review of Economic Design, Springer;Society for Economic Design, vol. 15(2), pages 163-175, June.

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