Financial Contracting, Signal–Jamming, and Entry Deterrence

We study the relationship between financial contracting and entry deterrence when the potential entrant observes the market price but does not observe the financial contract. This leads to the possibility that the entrant and the lender have different beliefs about the incumbent’s costs, due to uncertainty in the demand for the good. We show that as a result, the incumbent produces a different level of output in the first period and the probability of entry increases compared to the case when the entrant observes the financial contract.