Profit-Increasing Entry with Endogenous Banking

Keisuke Hattori

MPRA Paper from University Library of Munich, Germany

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.

Keywords: Profit-increasing entry; Cournot oligopoly; Contestable banking; Financial frictions (search for similar items in EconPapers)
JEL-codes: D43 G21 G32 L13 (search for similar items in EconPapers)
Date: 2026-01-31
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