The strategic effect of debt in dynamic price competition with fluctuating demand
AbstractThis paper shows that obligations from debt hinder tacit collusion if equity owners are protected by limited liability. In contrast to its advantageous commitment value in short-run competition, leverage reduces profits from infinite interaction. Contrasting uncorrelated shocks with a cyclical demand development, we show that in the first case optimal pricing is anticyclical. With demand cycles, it is anticyclical only if equity holders place a low value on future profits, but procyclical otherwise. In both cases, the cyclicity of prices increases with the debt level. Contrary to traditional wisdom, a lower degree of homogeneity may raise profits of leveraged firms. --
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Bibliographic InfoPaper provided by University of Tübingen, School of Business and Economics in its series Tübinger Diskussionsbeiträge with number 250.
Date of creation: 2002
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capital structure; dynamic competition; collusion; Preiswettbewerb; Kapitalstruktur; Kollusion;
Find related papers by JEL classification:
- L41 - Industrial Organization - - Antitrust Issues and Policies - - - Monopolization; Horizontal Anticompetitive Practices
- L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
- G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
- E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
- C73 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Stochastic and Dynamic Games; Evolutionary Games
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