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Entry deterrence through credit denial

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  • Showalter, Dean

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.

Suggested Citation

  • Showalter, Dean, 2010. "Entry deterrence through credit denial," International Review of Economics & Finance, Elsevier, vol. 19(4), pages 539-554, October.
    • Handle: RePEc:eee:reveco:v:19:y:2010:i:4:p:539-554
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    References listed on IDEAS

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    1. Showalter, Dean M, 1995. "Oligopoly and Financial Structure: Comment," American Economic Review, American Economic Association, vol. 85(3), pages 647-653, June.
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    Cited by:

    1. Bernard Franck & Nicolas Le Pape, 2020. "The limited liability effect: Implications for anticompetitive horizontal mergers," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 22(6), pages 2082-2102, December.

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