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Endogenous Market Structures and Corporate Finance

Author

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  • Federico Etro

Abstract

We characterize the optimal financial structure as a strategic de- vice to optimize the value of a firm competing in a market whose struc- ture is endogenous. Contrary to traditional results based on duopolies and depending on the form of competition, we show the general opti- mality of moderate debt financing whenever positive shocks increase the marginal profitability of strategies that reduce prices, indepen- dently from whether they are strategic susbtitutes or complements. We derive the general formulas for the optimal financial structure un- der Cournot and Bertrand competition with endogenous entry and cost uncertainty and extend the results in many directions.

Suggested Citation

  • Federico Etro, 2009. "Endogenous Market Structures and Corporate Finance," Working Papers 165, University of Milano-Bicocca, Department of Economics, revised Jul 2009.
    • Handle: RePEc:mib:wpaper:165
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    File URL: http://repec.dems.unimib.it/repec/pdf/mibwpaper165.pdf
    File Function: First version, 2009
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    More about this item

    Keywords

    Financial structure; Debt; Modigliani-Miller theorem; Endogenous entry;
    All these keywords.

    JEL classification:

    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms

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