Softening Competition by Enhancing Entry: An Example from the Banking Industry
35 Pages Posted: 6 Nov 2002
Date Written: October 2002
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.
Keywords: Barriers to Entry, Asymmetric Information, Switching Costs, Banking Competition
JEL Classification: D43, L13, G21
Suggested Citation: Suggested Citation