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Financial Structure and Product Qualities

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Author Info
Stylianos Perrakis () (Concordia University)
Christos Constantatos () (Department of Economics, University of Macedonia)
Jean Lefoll () (HEC, University of Geneva)
Abstract

We examine the interaction between financial and microeconomic decisions in a differentiated duopoly where additional willingness-to-pay for high quality is uncertain. Product specification is endogenous. We consider two three-stage games, according to the order of moves: qualities-financial structure-prices and financial structure-qualities-prices. Once debt is contracted, the manager maximizes equity instead of total value. We find that in both games debt a) increases both prices and qualities but most likely reduces product differentiation due to rival quality response; b) reduces the value of the levered high quality firm because it increases the low quality. Moreover, c) the cost of debt is higher for the second game, implying that it is higher for projects using debt to finance a product’s development-cumcommercialization compared to those financing only the commercialization stage.

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Paper provided by Department of Economics, University of Macedonia in its series Discussion Paper Series with number 2008_15.

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Date of creation: Dec 2008
Date of revision: Dec 2008
Handle: RePEc:mcd:mcddps:2008_15

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Related research
Keywords: Vertical differentiation; uncertainty; financial structure; leverage; sequential quality choice.;

Find related papers by JEL classification:
L00 - Industrial Organization - - General - - - General
G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Capital and Ownership Structure

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  3. Constantatos, Christos & Perrakis, Stylianos, 1997. "Vertical differentiation: Entry and market coverage with multiproduct firms," International Journal of Industrial Organization, Elsevier, vol. 16(1), pages 81-103, November. [Downloadable!] (restricted)
  4. Constantatos, Christos & Perrakis, Stylianos, 1999. "Free entry may reduce total willingness-to-pay1," Economics Letters, Elsevier, vol. 62(1), pages 105-112, January. [Downloadable!] (restricted)
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  8. Vojislav Maksimovic, 1988. "Capital Structure in Repeated Oligopolies," RAND Journal of Economics, The RAND Corporation, vol. 19(3), pages 389-407, Autumn. [Downloadable!] (restricted)
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  10. 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. [Downloadable!] (restricted)
  11. Shaked, Avner & Sutton, John, 1982. "Relaxing Price Competition through Product Differentiation," Review of Economic Studies, Blackwell Publishing, vol. 49(1), pages 3-13, January. [Downloadable!] (restricted)
  12. Massimo MOTTA & Jean-François THISSE & Antonio CABRALES, 1996. "On the Persistence of Leadership or Leapfrogging in International Trade," Cahiers de Recherches Economiques du Département d'Econométrie et d'Economie politique (DEEP) 9625, Université de Lausanne, Faculté des HEC, DEEP.
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