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Competition under Financial Distress

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  • Hendel, Igal
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    Abstract

    This paper presents a link between product market competition and the financial situation--in particular asset composition--of firms, based on capital market imperfections. Consistent with the popular view, the model shows that firms under financial distress use aggressive pricing to generate cash. Firms resort to aggressive pricing in order to reshape their asset composition between nonliquid and liquid assets when new information renders their current composition nonoptimal. In contrast to the vast literature on inventories that has given little attention to pricing, the model links pricing and inventory behavior. Low pricing is used as a source of internal funding. Copyright 1996 by Blackwell Publishing Ltd.

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    Bibliographic Info

    Article provided by Wiley Blackwell in its journal Journal of Industrial Economics.

    Volume (Year): 44 (1996)
    Issue (Month): 3 (September)
    Pages: 309-24

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    Handle: RePEc:bla:jindec:v:44:y:1996:i:3:p:309-24

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    Web page: http://www.blackwellpublishing.com/journal.asp?ref=0022-1821

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    Cited by:
    1. Anna Bottasso & Marzio Galeotti & Alessandro Sembenelli, 1997. "The Impact Of Financing Constraints On Markups: Theory And Evidence From Italian Firm Level Data," CERIS Working Paper 199706, Institute for Economic Research on Firms and Growth - Moncalieri (TO).
    2. Maria Garcia-Vega & Alessandra Guariglia, . "Volatility, Financial Constraints and Trade," Discussion Papers 08/04, University of Nottingham, Centre for Finance, Credit and Macroeconomics (CFCM).
    3. Severin Borenstein & Nancy L. Rose, 2003. "Do Airline Bankruptcies Reduce Air Service?," NBER Working Papers 9636, National Bureau of Economic Research, Inc.
    4. Lee, Hwa Ryung, 2009. "Bankruptcies and low-cost Carrier Expansion in the Airline Industry," Department of Economics, Working Paper Series qt8g8639tn, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
    5. Rainer Nitsche, 2000. "Incentives to Grow: Multimarket Firms and Predation," CIG Working Papers FS IV 00-19, Wissenschaftszentrum Berlin (WZB), Research Unit: Competition and Innovation (CIG).
    6. Tribó, Josep A., 2009. "Firms' stock market flotation: Effects on inventory policy," International Journal of Production Economics, Elsevier, vol. 118(1), pages 10-18, March.
    7. Ciliberto, Federico & Schenone, Carola, 2010. "Bankruptcy and Product-Market Competition: Evidence from the Airline Industry," MPRA Paper 24914, University Library of Munich, Germany.
    8. Nikolov, Pavel, 2010. "Procyclical Effects of the banking System during the financial and economic Crisis 2007-2009: the Case of Europe," MPRA Paper 23945, University Library of Munich, Germany.
    9. Holly, Sean & Turner, Paul, 2001. "Inventory investment and asymmetric adjustment: Some evidence for the UK," International Journal of Production Economics, Elsevier, vol. 72(3), pages 251-260, August.
    10. Josep A. Tribó, 2004. "Ownership Structure And Inventory Policy," Business Economics Working Papers wb043211, Universidad Carlos III, Departamento de Economía de la Empresa.
    11. Stefan ARPING, 2000. "Debt and Product Market Fragility," Cahiers de Recherches Economiques du Département d'Econométrie et d'Economie politique (DEEP) 00.21, Université de Lausanne, Faculté des HEC, DEEP.
    12. Nikolov, Pavel, 2010. "Procyclical Effects of the banking System during the financial and economic Crisis 2007-2009: the Case of Europe," MPRA Paper 24126, University Library of Munich, Germany, revised 27 Jul 2010.
    13. Povel, Paul & Raith, Michael, 2004. "Financial constraints and product market competition: ex ante vs. ex post incentives," International Journal of Industrial Organization, Elsevier, vol. 22(7), pages 917-949, September.
    14. Anna Bottasso, 1996. "Firms’ Financial Structure And Real Decisions: A Critical Survey Of The Empirical Literature," CERIS Working Paper 199623, Institute for Economic Research on Firms and Growth - Moncalieri (TO).
    15. Tribo, Josep A., 2001. "Inventories, financial structure and market structure," International Journal of Production Economics, Elsevier, vol. 71(1-3), pages 79-89, May.
    16. Arping, Stefan & Diaw, Khaled M., 2008. "Sunk costs, entry deterrence, and financial constraints," International Journal of Industrial Organization, Elsevier, vol. 26(2), pages 490-501, March.
    17. Hendel, Igal, 1997. "Aggressive pricing as a source of funding," Economics Letters, Elsevier, vol. 57(3), pages 275-281, December.

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