Strategic Experimentation in Financial Intermediation with Threat of Entry
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We study how the threat of entry affects financial contracting between an incumbent firm and a bank, in a stochastic and dynamic environment. Contracts are short term and public. We determine the effects of the first period financial contract on the first period outputs in face of the threat of entry. Specifically, it is shown that the distance between first period outputs is increased due to potential entry. This is due to two underlying effects: first, the threat of entry reduces the signal dampening effect and thus the surplus left to the low cost incumbent is reduced. Second, learning is more valuable as it decreases the probability of entry. Indeed, experimentation takes on a strategic form, since the bank must take into account the impact of the possible game on its expected profits. This work integrates the agency problem between a firm and its financial intermediary with the issue of entry-deterrence under uncertainty.
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Annals of Operations Research
Volume 114, Issue 1-4 , pp 203-227
- Cover Date
- Print ISSN
- Online ISSN
- Kluwer Academic Publishers
- Additional Links
- strategic experimentation
- signal dampening
- financial intermediation
- limit pricing
- entry deterrence
- Industry Sectors
- Author Affiliations
- 1. Graduate School of Management, Rice University, Houston, TX, 77251, USA
- 2. Department of Economics, Michigan State University, East Lansing, MI, 48824, USA
- 3. Department of Economics, University of Virginia, Charlottesville, VA, 22903, USA