Collusion and Banking Structure of a Duopoly

In This Paper, We Show That, in Debt Contract Relationships, the Choice of a Lender May Become a Determinant of the Extent of Competition in Downstream Industries. in the Presence of Imperfect Output Markets and Asymmetric Information in Financial Markets Members of an Industry May Achieve a Partial Collusion in the Output Market by Borrowing From the Same Bank. in an Oligopoly, Debt Is Pro-Competitive As It Gives Incentives to the Borrowing Firm to Undertake an Aggressive Output Strategy. This Aggressiveness Is Translated Into an Increased Output Strategy. This Aggressiveness Is Translates Into an Increased Output. As Each Firm Borrows, the Industry Becomes More Competitive. the Industry Also Becomes Riskier and Firms' Debt Value Is Decreased. a Common Lender Can Better Control These Incentive Effects and Hence Limit the Extent of Competition in the Output Market. This Model Finds a Natural Interpretation in an International Trade Context. the Result Shows That Freeing Financial Markets From Trade Barriers May Decrease the Competitiveness of International Oligopolies by Allowing Firms to Borrow From the Same Lender.