Anticompetitive Financial Contracting: The Design of Financial Claims

Abstract

This paper presents the first model where entry deterrence takes place throughfinancialrather thanproduct-marketchannels. 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 thatdebtdeters entry. This effect is more marked the less competitive the credit market is—somore credit market competition spurs more product market competition.