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Journal of Competition Law and Economics Advance Access originally published online on March 19, 2007
Journal of Competition Law and Economics 2007 3(2):233-241; doi:10.1093/joclec/nhm002
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© The Author (2007). Published by Oxford University Press. All rights reserved. For Permissions, please email: journals.permissions@oxfordjournals.org

BANK-FIRM RELATIONSHIP AS A STRATEGIC COMMITMENT IN A DUOPOLISTIC ENVIRONMENT

Tay-Cheng Ma*

Correspondence: * Associate Professor, Department of Finance, National Kaohsiung University of Applied Sciences, Taiwan. E-mail: tcma{at}cc.kuas.edu.tw

By using a three-stage game, this paper shows that an investment in the banking sector may commit a duopolistic firm to a more aggressive output stance. This aggressiveness is translated by an outward shift in the firm's reaction function, thus increasing its own output and decreasing its rival's output. While it is individually beneficial for a firm to invest in a banking business, both firms taken together in a duopoly industry are made worse-off by such an investment, because they produce too much. Firms are caught in a financial version of the prisoner's dilemma.


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