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Entry deterrence through credit denial

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  • Showalter, Dean

Abstract

Firms in oligopoly can use debt to commit to a strategic position that negatively affects rival firms and improves profitability. In this paper, I show that an incumbent firm can deter entry by using debt to commit to such a low price that an entrant's lender will not finance entry, even if the entrant's expected profit from entry is positive. Empirical evidence shows that concentration and debt are positively related in several industries, indicating that debt may be used to reduce competition.

Suggested Citation

  • Showalter, Dean, 2010. "Entry deterrence through credit denial," International Review of Economics & Finance, Elsevier, vol. 19(4), pages 539-554, October.
    • Handle: RePEc:eee:reveco:v:19:y:2010:i:4:p:539-554
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    References listed on IDEAS

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    1. Myers, Stewart C., 1977. "Determinants of corporate borrowing," Journal of Financial Economics, Elsevier, vol. 5(2), pages 147-175, November.
    2. A. Michael Spence, 1977. "Entry, Capacity, Investment and Oligopolistic Pricing," Bell Journal of Economics, The RAND Corporation, vol. 8(2), pages 534-544, Autumn.
    3. Stiglitz, Joseph E & Weiss, Andrew, 1981. "Credit Rationing in Markets with Imperfect Information," American Economic Review, American Economic Association, vol. 71(3), pages 393-410, June.
    4. Myers, Stewart C., 1984. "Capital structure puzzle," Working papers 1548-84., Massachusetts Institute of Technology (MIT), Sloan School of Management.
    5. Myers, Stewart C, 1984. " The Capital Structure Puzzle," Journal of Finance, American Finance Association, vol. 39(3), pages 575-592, July.
    6. Stewart C. Myers, 1984. "Capital Structure Puzzle," NBER Working Papers 1393, National Bureau of Economic Research, Inc.
    7. Isagawa, Nobuyuki, 2006. "Lender's risk incentive and debt concession," International Review of Economics & Finance, Elsevier, vol. 15(2), pages 141-150.
    8. Peter MacKay & Gordon M. Phillips, 2005. "How Does Industry Affect Firm Financial Structure?," Review of Financial Studies, Society for Financial Studies, vol. 18(4), pages 1433-1466.
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