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The commitment value of the debt: A reappraisal

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  • Franck, Bernard
  • Le Pape, Nicolas

Abstract

We analyze the strategic use of the debt in a duopoly model of Cournot competition. We consider a two stage model where debt acts as a commitment variable and we characterize subgame perfect equilibria. We differ from several models based on the strategic value of the debt such as Wanzenried [Wanzenried G. (2003), "Capital Structure Decisions and Output Market Competition Under Demand Uncertainty", International Journal of Industrial Organization 21, 171-200.] in showing that, if one assumes that the debt level acts as a commitment device, it is incorrect to consider bankruptcy risk as a strategic variable. We demonstrate properties concerning the influence of price volatility and product differentiation upon equilibrium values of production, default risk and debt obligation.

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Bibliographic Info

Article provided by Elsevier in its journal International Journal of Industrial Organization.

Volume (Year): 26 (2008)
Issue (Month): 2 (March)
Pages: 607-615

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Handle: RePEc:eee:indorg:v:26:y:2008:i:2:p:607-615

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Web page: http://www.elsevier.com/locate/inca/505551

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References

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  1. John S. Hughes & Jennifer L. Kao & Arijit Mukherji, 1998. "Oligopoly, Financial Structure, and Resolution of Uncertainty," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 7(1), pages 67-88, 03.
  2. Wanzenried, Gabrielle, 2003. "Capital structure decisions and output market competition under demand uncertainty," International Journal of Industrial Organization, Elsevier, vol. 21(2), pages 171-200, February.
  3. Maksimovic, Vojislav, 1990. " Product Market Imperfections and Loan Commitments," Journal of Finance, American Finance Association, vol. 45(5), pages 1641-53, December.
  4. James A. Brander & Tracy R. Lewis, 1988. "Bankruptcy Costs and the Theory of Oligopoly," Canadian Journal of Economics, Canadian Economics Association, vol. 21(2), pages 221-43, May.
  5. Ho-Chyuan Chen, 2005. "Strategic Debt And Rjv Competition ," Australian Economic Papers, Wiley Blackwell, vol. 44(2), pages 149-161, 06.
  6. Dean Showalter, 1999. "Debt as an Entry Deterrent Under Bertrand Price Competition," Canadian Journal of Economics, Canadian Economics Association, vol. 32(4), pages 1069-1081, August.
  7. Showalter, Dean M, 1995. "Oligopoly and Financial Structure: Comment," American Economic Review, American Economic Association, vol. 85(3), pages 647-53, June.
  8. Michel Poitevin, 1989. "Collusion and the Banking Structure of a Duopoly," Canadian Journal of Economics, Canadian Economics Association, vol. 22(2), pages 263-77, May.
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Citations

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Cited by:
  1. Tetsuya Shinkai & Takao Ohkawa & Makoto Okamura & Kozo Harimaya, 2012. "Delegation and Limited Liability in a Modern Capitalistic Economy," Discussion Paper Series 87, School of Economics, Kwansei Gakuin University, revised Apr 2012.
  2. Tetsuya Shinkai & Takao Ohkawa & Makoto Okamura & Kozo Harimaya, 2012. "Why did the Dutch East India Co. outperform the British East India Co.? —A theoretical explanation based on the objective of the firm and limited liability—," Discussion Paper Series 96, School of Economics, Kwansei Gakuin University, revised Dec 2012.
  3. Bernard Franck & Nicolas Le Pape, 2010. "Bankruptcy Risk, Product Market Competition and Horizontal Mergers," Working Papers halshs-00812086, HAL.
  4. Federico Etro, 2010. "Endogenous Market Structures and Contract Theory," Working Papers 181, University of Milano-Bicocca, Department of Economics, revised Mar 2010.
  5. repec:tep:teppwp:wp1019 is not listed on IDEAS
  6. Barnard Franck & Nicolas Le Pape, 2010. "Bankruptcy Risk, Product Market Competition and Horizontal Mergers," TEPP Working Paper 2010-19, TEPP.

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