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Softening competition by enhancing entry: : an example from the banking industry

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Author Info
Bouckaert, J.
Degryse, H. (Tilburg University, Center for Economic Research)

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Abstract

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.

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Paper provided by Tilburg University, Center for Economic Research in its series Discussion Paper with number 86.

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Date of creation: 2002
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Handle: RePEc:dgr:kubcen:200286

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Find related papers by JEL classification:
D43 - Microeconomics - - Market Structure and Pricing - - - Oligopoly and Other Forms of Market Imperfection
L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Mortgages

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  1. Tullio Jappelli & Marco Pagano, 2000. "Information Sharing in Credit Markets: A Survey," CSEF Working Papers 36, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy. [Downloadable!]
  2. Klemperer, Paul, 1995. "Competition When Consumers Have Switching Costs: An Overview with Applications to Industrial Organization, Macroeconomics, and International Trade," Review of Economic Studies, Blackwell Publishing, vol. 62(4), pages 515-39, October. [Downloadable!] (restricted)
  3. Kallberg, Jarl G. & Udell, Gregory F., 2003. "The value of private sector business credit information sharing: The US case," Journal of Banking & Finance, Elsevier, vol. 27(3), pages 449-469, March. [Downloadable!] (restricted)
  4. Pagano, Marco & Jappelli, Tullio, 1993. " Information Sharing in Credit Markets," Journal of Finance, American Finance Association, vol. 48(5), pages 1693-1718, December. [Downloadable!] (restricted)
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  5. Sharpe, Steven A, 1990. " Asymmetric Information, Bank Lending, and Implicit Contracts: A Stylized Model of Customer Relationships," Journal of Finance, American Finance Association, vol. 45(4), pages 1069-87, September. [Downloadable!] (restricted)
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  6. Giovanni Dell'Ariccia & Ezra Friedman & Robert Marquez, 1999. "Adverse Selection as a Barrier to Entry in the Banking Industry," RAND Journal of Economics, The RAND Corporation, vol. 30(3), pages 515-534, Autumn. [Downloadable!] (restricted)
  7. Bester,Helmut, 1988. "Bertrand equilibrium in a differentiated duopoly," Discussion Paper Serie A 209, University of Bonn, Germany.
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  8. Padilla, A. Jorge & Pagano, Marco, 2000. "Sharing default information as a borrower discipline device," European Economic Review, Elsevier, vol. 44(10), pages 1951-1980, December. [Downloadable!] (restricted)
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  9. Jan Bouckaert & Hans Degryse, 2006. "Entry and Strategic Information Display in Credit Markets," Economic Journal, Royal Economic Society, vol. 116(513), pages 702-720, 07. [Downloadable!] (restricted)
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  10. von Thadden, Ernst-Ludwig, 2004. "Asymmetric information, bank lending and implicit contracts: the winner's curse," Finance Research Letters, Elsevier, vol. 1(1), pages 11-23, March. [Downloadable!] (restricted)
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  11. Xavier Vives, 2001. "Competition in the Changing World of Banking," Oxford Review of Economic Policy, Oxford University Press, vol. 17(4), pages 535-547.
  12. Thomas Rønde, 2001. "Trade Secrets and Information Sharing," Journal of Economics & Management Strategy, Blackwell Publishing, vol. 10(3), pages 391-417, 09. [Downloadable!] (restricted)
  13. Aghion, Philippe & Bolton, Patrick, 1987. "Contracts as a Barrier to Entry," American Economic Review, American Economic Association, vol. 77(3), pages 388-401, June.
  14. Thomas Gehrig & Rune Stenbacka, 2000. "Information Sharing in Banking: A Collusive Device?," Econometric Society World Congress 2000 Contributed Papers 1837, Econometric Society. [Downloadable!]
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  15. Padilla, A Jorge & Pagano, Marco, 1997. "Endogenous Communication among Lenders and Entrepreneurial Incentives," Review of Financial Studies, Oxford University Press for Society for Financial Studies, vol. 10(1), pages 205-36.
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  16. Rajan, Raghuram G, 1992. " Insiders and Outsiders: The Choice between Informed and Arm's-Length Debt," Journal of Finance, American Finance Association, vol. 47(4), pages 1367-400, September. [Downloadable!] (restricted)
  17. Nilssen, Tore, 2000. "Consumer lock-in with asymmetric information," International Journal of Industrial Organization, Elsevier, vol. 18(4), pages 641-666, May. [Downloadable!] (restricted)
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