Financial Intermediation and Entry Deterrence

In this paper, we analyze the interaction between an incumbent firm's financial contract with abank and its product market decisions in the face of the threat of entry, in a dynamic model.The main results of the paper are: there exists a separating equilibrium with no limit pricing; thelow-cost incumbent repays more to the bank in the first period, due to the threat of entry; andthere are parameter values for which the bank makes more profits with the threat of entry thanwithout.