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Oligopoly and Limited Liability

Author

Listed:
  • Asplund, Marcus

    (Dept. of Economics, Stockholm School of Economics)

Abstract

This paper studies the strategic interaction on oligopolistic markets where firms have debt obligations. For sufficiently high (low) quantities (prices) of the competitors there exists no unique strategy that maximise equity holders payoff, since whatever quantity (price) an indebted firms sets, operating profits will not cover debt. The result is an infinite number of weak, and not necessarily any strict, Nash equilibria. Howqever, many of these involve weakly dominated strategies. For low debt levels, there ixist a unique strict N.E., which is the only strategy to survive iterated elimination of ewakly dominated strategies. For high debt levels, it is only possible to give upper and lower bounds of the surviving strategies. Generally, the bounds of the surviving strategies (prices or quantities) are increasing in debt levels. The analysis substantially generalises earlier work and provides some new insights into the relation between financial structure and product market behaviour.

Suggested Citation

  • Asplund, Marcus, 1995. "Oligopoly and Limited Liability," SSE/EFI Working Paper Series in Economics and Finance 45, Stockholm School of Economics.
    • Handle: RePEc:hhs:hastef:0045
    as

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    More about this item

    Keywords

    Limited liability; oligopoly; weakly dominated strategies;
    All these keywords.

    JEL classification:

    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets

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