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Oligopoly and financial structure revisited

Author

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  • Krishnendu Dastidar

    (Jawaharlal Nehru University)

Abstract

In this paper we employ a two stage Cournot duopoly model where firms can obtain outside funds only to finance production plans payouts to shareholders are not allowed. Debt, equity and capacity are chosen in the first stage and output is chosen in the second stage. In contrast to the existing literature in this area, we show firms always choose zero debt in equilibrium. The two important implications of our analysis are (a) while there are linkages between financial structure and product market decisions, these linkages have no real effect on the choice of optimal capital structure of a firm, and (b) the standard results in this area are not robust to model specifications.

Suggested Citation

  • Krishnendu Dastidar, 2003. "Oligopoly and financial structure revisited," Economics Bulletin, AccessEcon, vol. 12(3), pages 1-12.
    • Handle: RePEc:ebl:ecbull:eb-03l10016
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    References listed on IDEAS

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    1. Dixit, Avinash, 1980. "The Role of Investment in Entry-Deterrence," Economic Journal, Royal Economic Society, vol. 90(357), pages 95-106, March.
    2. Vojislav Maksimovic, 1988. "Capital Structure in Repeated Oligopolies," RAND Journal of Economics, The RAND Corporation, vol. 19(3), pages 389-407, Autumn.
    3. K. Ghosh Dastidar, 1994. "Debt Financing With Limited Liability And Quantity Competition," Working papers 19, Centre for Development Economics, Delhi School of Economics.
    4. Harris, Milton & Raviv, Artur, 1991. "The Theory of Capital Structure," Journal of Finance, American Finance Association, vol. 46(1), pages 297-355, March.
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    Cited by:

    1. M. Pilar Socorro, 2004. "Mergers and the limited liability effect," Documentos de trabajo conjunto ULL-ULPGC 2004-11, Facultad de Ciencias Económicas de la ULPGC.

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    More about this item

    JEL classification:

    • L1 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance
    • D4 - Microeconomics - - Market Structure, Pricing, and Design

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