Entry Deterrence in Banking: The Role of Cost Asymmetry and Adverse Selection

18 Pages Posted: 7 May 2009 Last revised: 12 May 2009

See all articles by Sugata Marjit

Sugata Marjit

Indian Institute of Foreign Trade; Centre for Studies in Social Sciences, Calcutta; City University of Hong Kong (CityUHK) - Department of Economics & Finance

Hamid Beladi

University of Texas at San Antonio - College of Business - Department of Economics

Indrajit Mallick

Centre for Studies in Social Sciences Calcutta

Date Written: May 4, 2009

Abstract

In this paper, we review and explore the strategic mechanisms that deter entry in banking. The literature relies on externality between banks to generate entry deterrence. Typically, the externality generated is caused by differential adverse selection faced by incumbents and entrants. In this paper it is shown that adverse selection problem between a bank and its borrowers is neither a necessary nor a sufficient condition for entry deterrence. We show that cost asymmetry between different types of incumbents and private information about costs can generate conditional entry deterrence. This source of externality can cause entry deterrence just as other types of externalities created by differential adverse selection. Forward contracts can act as signaling device for incumbent costs. Incorporating adverse selection problem in the credit market in fact relaxes entry conditions: entry can take place even if the incumbent is of strong type and can signal credibly.

Keywords: Entry Deterrence, Cost Asymmetry, Adverse Selection, Signaling

JEL Classification: C7, D4, G1, L1

Suggested Citation

Marjit, Sugata and Beladi, Hamid and Mallick, Indrajit, Entry Deterrence in Banking: The Role of Cost Asymmetry and Adverse Selection (May 4, 2009). Available at SSRN: https://ssrn.com/abstract=1398751 or http://dx.doi.org/10.2139/ssrn.1398751

Sugata Marjit

Indian Institute of Foreign Trade ( email )

New Delhi
QUTUB INSTITUTIONAL AREA
NEW DELHI, 110016
India

Centre for Studies in Social Sciences, Calcutta ( email )

R 1, B.P. Township
Kolkata, West Bengal, India
Kolkata, West Bengal 700094
India

City University of Hong Kong (CityUHK) - Department of Economics & Finance ( email )

83 Tat Chee Avenue
Kowloon
Hong Kong

Hamid Beladi

University of Texas at San Antonio - College of Business - Department of Economics ( email )

One UTSA Circle
P.O. Box 5636
San Antonio, TX 78249
United States
210-458-7038 (Phone)
210-458-7040 (Fax)

Indrajit Mallick (Contact Author)

Centre for Studies in Social Sciences Calcutta ( email )

R! Baishnabghata Patuli Township
Kolkata, West Bengal, India
Kolkata, West Bengal 700094
India
91-033-24627252 (Phone)
91-033-24626183 (Fax)

HOME PAGE: http://www.cssscal.org

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
61
Abstract Views
651
rank
424,407
PlumX Metrics