Capacity-Price-Competition and Financial Structure
19 Pages Posted: 19 Mar 2002
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: Suggested Citation
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