Capacity-Price-Competition and Financial Structure

19 Pages Posted: 19 Mar 2002

See all articles by Frank Schuhmacher

Frank Schuhmacher

University of Applied Sciences and Technology Aachen (RWTH Aachen)

Abstract

It is known that the Cournot model of quantity competition has to be interpreted as the reduced form of a more complex situation, in which firms can commit to capacity levels prior to setting prices. I show that the optimal strategic debt choice of capacity-price competitors depend on the type of uncertainty that exists in the oligopoly market. The main contribution of the paper is to illustrate a result that is opposite of the Cournot outcome in Brander and Lewis (1986) and the Bertrand result in Showalter (1995): in the case of capacity-price competition where the demand conditions are uncertain, firms will use no debt despite the fact that both Bertrand firms and Cournot firms facing uncertain demand conditions choose positive debt levels.

Keywords: oligopoly, bankruptcy, debt-equity ratio

JEL Classification: G32

Suggested Citation

Schuhmacher, Frank, Capacity-Price-Competition and Financial Structure. Available at SSRN: https://ssrn.com/abstract=302407 or http://dx.doi.org/10.2139/ssrn.302407

Frank Schuhmacher (Contact Author)

University of Applied Sciences and Technology Aachen (RWTH Aachen) ( email )

Templegraben 64
Aachen
Germany

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