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The strategic use of debt reconsidered

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  • Haan, Marco A.
  • Toolsema, Linda A.

Abstract

We consider a two-stage differentiated goods duopoly model with demand uncertainty linking firms' capital structure choice to their output market decisions. Using a numerical analysis, we study how the equilibrium of the model is affected by demand volatility and the substitutability between products. In doing so, we correct a mistake in earlier papers in this literature. Most importantly, we find that the equilibrium debt level decreases as demand becomes more volatile.

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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: 616-624

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Handle: RePEc:eee:indorg:v:26:y:2008:i:2:p:616-624

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

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References

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  1. Showalter, Dean M, 1995. "Oligopoly and Financial Structure: Comment," American Economic Review, American Economic Association, vol. 85(3), pages 647-53, June.
  2. Haan, M.A. & Toolsema, L.A., 2006. "License auctions when winning bids are financed through debt," Research Report 06F06, University of Groningen, Research Institute SOM (Systems, Organisations and Management).
  3. Dan Kovenock & Gordon M Phillips, 1995. "Capital Structure and Product Market Behavior: An Examination of Plant Exit and Investment Decisions," Working Papers 95-4, Center for Economic Studies, U.S. Census Bureau.
  4. Vojislav Maksimovic, 1988. "Capital Structure in Repeated Oligopolies," RAND Journal of Economics, The RAND Corporation, vol. 19(3), pages 389-407, Autumn.
  5. Jensen, Richard & Showalter, Dean, 2004. "Strategic debt and patent races," International Journal of Industrial Organization, Elsevier, vol. 22(7), pages 887-915, September.
  6. 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.
  7. Jörg Oechssler & Frank Schuhmacher, 2001. "The Limited Liability Effect in Experimental Duopoly Markets," Bonn Econ Discussion Papers bgse36_2001, University of Bonn, Germany.
  8. Chevalier, Judith A, 1995. " Do LBO Supermarkets Charge More? An Empirical Analysis of the Effects of LBOs on Supermarket Pricing," Journal of Finance, American Finance Association, vol. 50(4), pages 1095-1112, September.
  9. Opler, Tim C & Titman, Sheridan, 1994. " Financial Distress and Corporate Performance," Journal of Finance, American Finance Association, vol. 49(3), pages 1015-40, July.
  10. Showalter, Dean, 1999. "Strategic debt: evidence in manufacturing," International Journal of Industrial Organization, Elsevier, vol. 17(3), pages 319-333, April.
  11. Phillips, Gordon M., 1995. "Increased debt and industry product markets An empirical analysis," Journal of Financial Economics, Elsevier, vol. 37(2), pages 189-238, February.
  12. 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.
  13. 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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Cited by:
  1. Federico Etro, 2010. "Endogenous Market Structures and Contract Theory," Working Papers 181, University of Milano-Bicocca, Department of Economics, revised Mar 2010.

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