Download now Free registration required
This paper examines the impact of a credit crunch on market structure. The author constructs and simulates a dynamic model of a duopolistic industry in which firms' investment in capacity are constrained by credit availability. In such an industry the dynamic interaction of credit limits and the competitive responses of firms turn out to be a powerful transmission mechanism by which effects of shocks amplify and persist. The author shows that a small, temporary shock to one firms' capacity can lead to its market exit - even if it is equally productive as the remaining incumbent in the beginning. Consequently, if a recession is accompanied by a credit crunch, its cleansing effect might lead to monopolization of markets and welfare losses.
- Format: PDF
- Size: 1265 KB