Entry and exit with imperfect information and sluggish market share

Author(s): Zephirin, Mary G (1993)

Created 22 Jul, 1993
Categories Working Papers
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This paper shows how the sluggish market share resulting from switching costs of the customers of established banks, together with imperfect information about prospects in a growing market, can lead to exit of recent entrants. Entrants are at a disadvantage relative to incumbents because a) current demand for services depends on established market share and b) new banks have a fixed or opportunity cost of operation. Entrants acquire mainly unattached customers of uncertain value. If the business generated by the new clientele proves insufficient to cover costs, the entrant must exit. The results are sensitive to the number of incumbents: exit is more likely with the more aggressive pricing adopted when there are a larger number of incumbents. The model is intended to explain why entry into Caribbean banking markets has often proved unsustainable.

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