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The commitment value of the debt: A reappraisal

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  • Franck, Bernard
  • Le Pape, Nicolas

Abstract

We analyze the strategic use of the debt in a duopoly model of Cournot competition. We consider a two stage model where debt acts as a commitment variable and we characterize subgame perfect equilibria. We differ from several models based on the strategic value of the debt such as Wanzenried [Wanzenried G. (2003), "Capital Structure Decisions and Output Market Competition Under Demand Uncertainty", International Journal of Industrial Organization 21, 171-200.] in showing that, if one assumes that the debt level acts as a commitment device, it is incorrect to consider bankruptcy risk as a strategic variable. We demonstrate properties concerning the influence of price volatility and product differentiation upon equilibrium values of production, default risk and debt obligation.

Suggested Citation

  • 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.
  • Handle: RePEc:eee:indorg:v:26:y:2008:i:2:p:607-615
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    1. Showalter, Dean M, 1995. "Oligopoly and Financial Structure: Comment," American Economic Review, American Economic Association, vol. 85(3), pages 647-653, June.
    2. Vojislav Maksimovic, 1988. "Capital Structure in Repeated Oligopolies," RAND Journal of Economics, The RAND Corporation, vol. 19(3), pages 389-407, Autumn.
    3. Brander, James A. & Lewis, Tracy R., 1986. "Oligopoly and Financial Structure: The Limited Liability Effect," American Economic Review, American Economic Association, vol. 76(5), pages 956-970, December.
    4. 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.
    5. Jensen, Michael C. & Meckling, William H., 1976. "Theory of the firm: Managerial behavior, agency costs and ownership structure," Journal of Financial Economics, Elsevier, vol. 3(4), pages 305-360, October.
    6. Ho-Chyuan Chen, 2005. "Strategic Debt And Rjv Competition ," Australian Economic Papers, Wiley Blackwell, vol. 44(2), pages 149-161, June.
    7. 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.
    8. 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, March.
    9. James A. Brander & Tracy R. Lewis, 1988. "Bankruptcy Costs and the Theory of Oligopoly," Canadian Journal of Economics, Canadian Economics Association, vol. 21(2), pages 221-243, May.
    10. Michel Poitevin, 1989. "Collusion and the Banking Structure of a Duopoly," Canadian Journal of Economics, Canadian Economics Association, vol. 22(2), pages 263-277, May.
    11. Maksimovic, Vojislav, 1990. " Product Market Imperfections and Loan Commitments," Journal of Finance, American Finance Association, vol. 45(5), pages 1641-1653, December.
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    Cited by:

    1. Tetsuya Shinkai & Takao Ohkawa & Makoto Okamura & Kozo Harimaya, 2015. "Strategic Delegation of Indebted Firms in a Duopoly with Uncertain Demand," Discussion Paper Series 135, School of Economics, Kwansei Gakuin University, revised Sep 2015.
    2. Magali Pedro Costa & Cesaltina Pires, 2014. "Capital Structure, Product Market Competition and Default Risk," CEFAGE-UE Working Papers 2014_14, University of Evora, CEFAGE-UE (Portugal).
    3. Tetsuya Shinkai & Takao Ohkawa & Makoto Okamura & Kozo Harimaya, 2012. "Why did the Dutch East India Co. outperform the British East India Co.? —A theoretical explanation based on the objective of the firm and limited liability—," Discussion Paper Series 96, School of Economics, Kwansei Gakuin University, revised Dec 2012.
    4. Barnard Franck & Nicolas Le Pape, 2010. "Bankruptcy Risk, Product Market Competition and Horizontal Mergers," TEPP Working Paper 2010-19, TEPP.
    5. Federico Etro, 2010. "Endogenous Market Structures and Contract Theory," Working Papers 181, University of Milano-Bicocca, Department of Economics, revised Mar 2010.
    6. Tetsuya Shinkai & Takao Ohkawa & Makoto Okamura & Kozo Harimaya, 2012. "Delegation and Limited Liability in a Modern Capitalistic Economy," Discussion Paper Series 87, School of Economics, Kwansei Gakuin University, revised Apr 2012.

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