Entry deterrence through credit denial

Dean Showalter

International Review of Economics & Finance, 2010, vol. 19, issue 4, 539-554

Abstract: Firms in oligopoly can use debt to commit to a strategic position that negatively affects rival firms and improves profitability. In this paper, I show that an incumbent firm can deter entry by using debt to commit to such a low price that an entrant's lender will not finance entry, even if the entrant's expected profit from entry is positive. Empirical evidence shows that concentration and debt are positively related in several industries, indicating that debt may be used to reduce competition.

Keywords: Strategic; debt; Game; theory; Credit; rationing (search for similar items in EconPapers)
Date: 2010
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Citations: View citations in EconPapers (1)

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