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The strategic use of debt reconsidered

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  • Haan, M.A.
  • Toolsema, L.A.

    (Groningen University)

Abstract

Wanzenried (2003, International Journal of Industrial Organization 21(2), 171-200) considers a two-stage differentiated goods duopoly model with demand uncertainty linking firms? capital structure choice to their output market decisions. Unfortunately, her analysis is flawed. We correct for this, and solve the model umerically to find some results that are qualitatively different from hers. First, in equilibrium, the use of debt always yields lower firm profits, i.e. even in the case of complements. Second, the equilibrium debt level decreases as demand becomes more volatile. We also discuss some problems with the debt contract commonly used in the strategic debt literature.

Suggested Citation

  • Haan, M.A. & Toolsema, L.A., 2003. "The strategic use of debt reconsidered," Research Report 03E37, University of Groningen, Research Institute SOM (Systems, Organisations and Management).
    • Handle: RePEc:gro:rugsom:03e37
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    File URL: http://irs.ub.rug.nl/ppn/291409172
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    References listed on IDEAS

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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.
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    8. repec:dgr:rugsom:06f06 is not listed on IDEAS
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    Cited by:

    1. Federico Etro, 2010. "Endogenous market structures and the optimal financial structure," Canadian Journal of Economics, Canadian Economics Association, vol. 43(4), pages 1333-1352, November.
    2. Bernard Franck & Nicolas Le Pape, 2020. "The limited liability effect: Implications for anticompetitive horizontal mergers," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 22(6), pages 2082-2102, December.
    3. 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).
    4. Federico Etro, 2010. "Endogenous Market Structures and Contract Theory," Working Papers 181, University of Milano-Bicocca, Department of Economics, revised Mar 2010.
    5. Sai Zhao & Lei Fang, 2023. "Debt financing, first‐mover advantage, and vertical product differentiation," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 44(1), pages 502-514, January.
    6. de Jong, A. & Nguyen, T.T. & van Dijk, M.A., 2007. "Strategic Debt: Evidence from Bertrand and Cournot Competition," ERIM Report Series Research in Management ERS-2007-057-F&A, Erasmus Research Institute of Management (ERIM), ERIM is the joint research institute of the Rotterdam School of Management, Erasmus University and the Erasmus School of Economics (ESE) at Erasmus University Rotterdam.
    7. Wang Tao & Wang Ruqu, 2018. "Limited Liability and High Bids in English Auctions," The B.E. Journal of Theoretical Economics, De Gruyter, vol. 18(2), pages 1-12, July.
    8. Metin Sengul, 2019. "Organization design as a competitive choice: an application to the study of innovation," Journal of Organization Design, Springer;Organizational Design Community, vol. 8(1), pages 1-9, December.

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