Financial Structure and Product Qualities
We examine the interaction between financial and microeconomic decisions in a differentiated duopoly where additional willingness-to-pay for high quality is uncertain. Product specification is endogenous. We consider two three-stage games, according to the order of moves: qualities-financial structure-prices and financial structure-qualities-prices. Once debt is contracted, the manager maximizes equity instead of total value. We find that in both games debt a) increases both prices and qualities but most likely reduces product differentiation due to rival quality response; b) reduces the value of the levered high quality firm because it increases the low quality. Moreover, c) the cost of debt is higher for the second game, implying that it is higher for projects using debt to finance a product’s development-cumcommercialization compared to those financing only the commercialization stage.
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Chevalier, Judith A & Scharfstein, David S, 1996.
"Capital-Market Imperfections and Countercyclical Markups: Theory and Evidence,"
American Economic Review,
American Economic Association, vol. 86(4), pages 703-25, September.
- Judith A. Chevalier & David S. Scharfstein, 1994. "Capital Market Imperfections and Countercyclical Markups: Theory and Evidence," NBER Working Papers 4614, National Bureau of Economic Research, Inc.
- Michel Poitevin, 1989. "Collusion and the Banking Structure of a Duopoly," Canadian Journal of Economics, Canadian Economics Association, vol. 22(2), pages 263-77, May.
- Shaked, Avner & Sutton, John, 1982. "Relaxing Price Competition through Product Differentiation," Review of Economic Studies, Wiley Blackwell, vol. 49(1), pages 3-13, January.
- Showalter, Dean, 1999. "Strategic debt: evidence in manufacturing," International Journal of Industrial Organization, Elsevier, vol. 17(3), pages 319-333, April.
- Showalter, Dean M, 1995. "Oligopoly and Financial Structure: Comment," American Economic Review, American Economic Association, vol. 85(3), pages 647-53, June.
- Jean Tirole, 1988. "The Theory of Industrial Organization," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262200716, June.
- Sudipto Dasgupta & Sheridan Titman, 1996.
"Pricing Strategy and Financial Policy,"
NBER Working Papers
5498, National Bureau of Economic Research, Inc.
- Harris, Milton & Raviv, Artur, 1991. " The Theory of Capital Structure," Journal of Finance, American Finance Association, vol. 46(1), pages 297-355, March.
- Jaskold Gabszewicz, J. & Thisse, J. -F., 1980.
"Entry (and exit) in a differentiated industry,"
Journal of Economic Theory,
Elsevier, vol. 22(2), pages 327-338, April.
- Constantatos, Christos & Perrakis, Stylianos, 1997. "Vertical differentiation: Entry and market coverage with multiproduct firms," International Journal of Industrial Organization, Elsevier, vol. 16(1), pages 81-103, November.
- 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.
- Bulow, Jeremy I & Geanakoplos, John D & Klemperer, Paul D, 1985. "Multimarket Oligopoly: Strategic Substitutes and Complements," Journal of Political Economy, University of Chicago Press, vol. 93(3), pages 488-511, June.
- Constantatos, Christos & Perrakis, Stylianos, 1999. "Free entry may reduce total willingness-to-pay1," Economics Letters, Elsevier, vol. 62(1), pages 105-112, January.
- Chevalier, Judith A, 1995. " Do LBO Supermarkets Charge More? An Empirical Analysis of the Effects of LBOs on Supermarket Pricing," Journal of Finance, American Finance Association, vol. 50(4), pages 1095-1112, September.
- Shaked, Avner & Sutton, John, 1983. "Natural Oligopolies," Econometrica, Econometric Society, vol. 51(5), pages 1469-83, September.
- Vojislav Maksimovic, 1988. "Capital Structure in Repeated Oligopolies," RAND Journal of Economics, The RAND Corporation, vol. 19(3), pages 389-407, Autumn.
When requesting a correction, please mention this item's handle: RePEc:mcd:mcddps:2008_15. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Theodore Panagiotidis)
If references are entirely missing, you can add them using this form.