Profit-Increasing Entry with Endogenous Banking

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.