Adverse selection as a barrier to entry in the banking industry

Banks offering credit to borrowers are faced with uncertainty about their c reditworthiness, If banks obtain information about borrowers after lending to them, they are able to reject riskier borrowers when refinancing, Potent ial entrant banks will face art adverse-selection problem stemming from the ir inability to distinguish new borrowers from old borrowers who have been rejected by their previous bank, We analyze the effects of asymmetric infor mation on the market structure of the banking industry. We characterize the equilibrium under Bertrand competition with two banks, and show that art e quilibrium where a third bank enters does not exist (blockaded entry).