Spatial Competition in Credit Markets

Heidrun C. Hoppe () and Ulrich Lehmann-Grube
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Heidrun C. Hoppe: Universität Hamburg and CSEF, University of Salerno
Ulrich Lehmann-Grube: Universität Hamburg

CSEF Working Papers from Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy

Abstract: Using Hotelling's two-stage model of spatial competition, we develop a lending model where the equilibrium outcome may be characterized by maximal differentiation - in contrast to Hotelling's model where firms have an incentive to reduce differentiation, as long as a pure-strategy price equilibrium exists. The difference is due to the specificities of banks' activities: banks perform independent tests to assess the credit-worthiness of their loan applicants, and thereby create a nongeographic customer heterogeneity. If banks are sufficiently pessimistic about the credit-worthiness of firms, they try to minimize the risk of default by moving away from the market center

Keywords: Banking competition; Hotelling; information acquisition; credit-worthiness tests (search for similar items in EconPapers)
JEL-codes: D83 G21 L13 (search for similar items in EconPapers)
Date: 2000-01-01
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Published with the title “Price Competition in Markets with Customer Testing: the Captive Customer Effect” in Economic Theory, 2008, vol. 35, 497–521

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