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Profit-Increasing Entry with Endogenous Banking

Author

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  • Hattori, Keisuke

Abstract

This paper shows that entry can raise each individual firm's profit---not merely industry profits---when Cournot oligopolists finance working capital through a contestable banking sector. Under average-cost pricing of loans, entry dilutes fixed banking costs across greater lending volume, lowering loan rates. Entry raises per-firm profits if and only if equilibrium output lies in an intermediate range where financing relief dominates intensified competition. Bank-side and firm-side frictions play opposing roles: firm-side frictions facilitate profit-increasing entry by amplifying cost relief as firms shrink, while bank-side frictions suppress it by raising funding costs as aggregate lending expands.

Suggested Citation

  • Hattori, Keisuke, 2026. "Profit-Increasing Entry with Endogenous Banking," MPRA Paper 127926, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:127926
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    File URL: https://mpra.ub.uni-muenchen.de/127926/1/20260130.pdf
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    References listed on IDEAS

    as
    1. Jayaratne, Jith & Strahan, Philip E, 1998. "Entry Restrictions, Industry Evolution, and Dynamic Efficiency: Evidence from Commercial Banking," Journal of Law and Economics, University of Chicago Press, vol. 41(1), pages 239-273, April.
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    5. Xavier Vives, 2016. "Competition and Stability in Banking: The Role of Regulation and Competition Policy," Economics Books, Princeton University Press, edition 1, number 10741, December.
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    7. Mukherjee, Arijit, 2019. "Profit raising entry in a vertical structure," Economics Letters, Elsevier, vol. 183(C), pages 1-1.
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    Keywords

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    JEL classification:

    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets

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