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Debt as an Entry Deterrent Under Bertrand Price Competition

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  • Dean Showalter

Abstract

In recent studies of strategic debt little attention has been paid to the use of debt in deterring potential rivals. I show that in a Bertrand-type industry where costs are uncertain, an incumbent monopolist can deter entry by using debt to commit to a sufficiently low price. If demand is uncertain, deterrence is not possible, and an incumbent will choose positive debt levels to induce 'softer' post-entry competition. The results under demand uncertainty support recent empirical evidence that leverage is negatively associated with output and positively associated with prices

Suggested Citation

  • 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.
  • Handle: RePEc:cje:issued:v:32:y:1999:i:4:p:1069-1081
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    Citations

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    Cited by:

    1. Guigou, Jean-Daniel, 2002. "Contrats de dette participative en environnement stratégique," L'Actualité Economique, Société Canadienne de Science Economique, vol. 78(1), pages 5-17, Mars.
    2. Argenton, Cédric & Willems, Bert, 2015. "Exclusion through speculation," International Journal of Industrial Organization, Elsevier, vol. 39(C), pages 1-9.
    3. Franck, Bernard & Le Pape, Nicolas, 2008. "The commitment value of the debt: A reappraisal," International Journal of Industrial Organization, Elsevier, vol. 26(2), pages 607-615, March.
    4. Martin, Richard, 2003. "Debt financing and entry," International Journal of Industrial Organization, Elsevier, vol. 21(4), pages 533-549, April.
    5. Spiros Bougheas & Saksit Thananittayaudom, 2006. "Financial Predation by the "Weak"," International Journal of Business and Economics, College of Business and College of Finance, Feng Chia University, Taichung, Taiwan, vol. 5(3), pages 231-244, December.
    6. Leach, J. Chris & Moyen, Nathalie & Yang, Jing, 2013. "On the strategic use of debt and capacity in rapidly expanding markets," Journal of Corporate Finance, Elsevier, vol. 23(C), pages 332-344.
    7. Christos Constantatos & Stylianos Perrakis, 2010. "On the Impact of Financial Structure on Product Selection," Discussion Paper Series 2010_11, Department of Economics, University of Macedonia, revised Nov 2010.
    8. Leach, J. Chris & Moyen, Nathalie & Yang, Jing, 2004. "On the Strategic Use of Debt and Capacity in Imperfectly Competitive Product Markets," SIFR Research Report Series 33, Institute for Financial Research.
    9. Michael Riordan, 2003. "How Do Capital Markets Influence Product Market Competition?," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 23(3), pages 179-191, December.
    10. Federico Etro, 2006. "Market Leaders and Industrial Policy," Working Papers 103, University of Milano-Bicocca, Department of Economics, revised Nov 2006.
    11. Stylianos Perrakis & Christos Constantatos & Jean Lefoll, 2008. "Financial Structure and Product Qualities," Discussion Paper Series 2008_15, Department of Economics, University of Macedonia, revised Dec 2008.
    12. Marcel Boyer & Armel Jacques & Michel Moreaux, 2001. "Bankruptcy Cost, Financial Structure and Technological Flexibility Choices," CIRANO Working Papers 2001s-27, CIRANO.

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