Anticompetitive Financial Contracting: The Design of Financial Claims

Authors

  • Giacinta Cestone,

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    • Cestone is at the Institut d'Anàlisi Econòmica (CSIC) and CEPR, and White is at Harvard Business School and CEPR. We would like to thank Jean Tirole for his comments and encouragement. We are also grateful to Sudipto Bhattacharya, Liam Brunt, Giovanni Cespa, Mathias Dewatripont, Denis Gromb, Josh Lerner, Thomas Mariotti, David Martimort, Felix Muennich, Marco Pagano, Fausto Panunzi, Lambros Pechlivanos, Patrick Rey, Klaus Schmidt, Giancarlo Spagnolo, Oved Yosha, Richard Green (the editor), and two anonymous referees for very helpful insights, as well as seminar participants at CSEF-University of Salerno, Harvard Business School, Kellogg School of Management, Stern School of Business, Universitat Autonoma de Barcelona, University College of London, Ente Einaudi, and the Meeting of the European Economic Association. This paper was written when both authors were Ph.D. students at the Université de Toulouse. The first author acknowledges financial support from the TMR Network on “The Industrial Organization of Banking and Financial Markets in Europe.”
  • Lucy White

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    • Cestone is at the Institut d'Anàlisi Econòmica (CSIC) and CEPR, and White is at Harvard Business School and CEPR. We would like to thank Jean Tirole for his comments and encouragement. We are also grateful to Sudipto Bhattacharya, Liam Brunt, Giovanni Cespa, Mathias Dewatripont, Denis Gromb, Josh Lerner, Thomas Mariotti, David Martimort, Felix Muennich, Marco Pagano, Fausto Panunzi, Lambros Pechlivanos, Patrick Rey, Klaus Schmidt, Giancarlo Spagnolo, Oved Yosha, Richard Green (the editor), and two anonymous referees for very helpful insights, as well as seminar participants at CSEF-University of Salerno, Harvard Business School, Kellogg School of Management, Stern School of Business, Universitat Autonoma de Barcelona, University College of London, Ente Einaudi, and the Meeting of the European Economic Association. This paper was written when both authors were Ph.D. students at the Université de Toulouse. The first author acknowledges financial support from the TMR Network on “The Industrial Organization of Banking and Financial Markets in Europe.”

Abstract

This paper presents the first model where entry deterrence takes place through financial rather than product-market channels. In existing models, a firm's choice of financial instruments deters entry by affecting product market behavior; here entry deterrence occurs by affecting the credit market behavior of investors towards entrant firms. We find that to deter entry, the claims held on incumbent firms should be sufficiently risky, that is, equity. This contrasts with the standard Brander and Lewis (1986) result that debt deters entry. This effect is more marked the less competitive the credit market is—so more credit market competition spurs more product market competition.

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