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Oligopoly, Financial Structure, and Resolution of Uncertainty

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  • John S. Hughes
  • Jennifer L. Kao
  • Arijit Mukherji

Abstract

We characterize equilibria of a multistage game in which competing duopolists may acquire and share information in advance of choosing their financial structure which, in turn, precedes production. Given sufficient uncertainty, equilibria exist in which the efficiency and, possibly, coordination gains to acquiring and sharing perfect information are sufficient to break Brander and Lewis's (1986) result wherein both firms issue debt to their mutual disadvantage. However, more interesting may be the robustness of that result when uncertainty is low or when information is imperfect. The key insight is that the consequences of issuing debt are invariant to the level of uncertainty, given that firms can recalibrate the terms of debt to achieve the Stackelberg solution.

Suggested Citation

  • 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.
    • Handle: RePEc:bla:jemstr:v:7:y:1998:i:1:p:67-88
    DOI: 10.1111/j.1430-9134.1998.00067.x
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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.
    2. Bagwell, Kyle, 1995. "Commitment and observability in games," Games and Economic Behavior, Elsevier, vol. 8(2), pages 271-280.
    3. Kovenock, Dan & Phillips, Gordon, 1995. "Capital Structure and Product-Market Rivalry: How Do We Reconcile Theory and Evidence?," American Economic Review, American Economic Association, vol. 85(2), pages 403-408, May.
    4. Phillips, Gordon M., 1995. "Increased debt and industry product markets An empirical analysis," Journal of Financial Economics, Elsevier, vol. 37(2), pages 189-238, February.
    5. Chevalier, Judith A, 1995. "Capital Structure and Product-Market Competition: Empirical Evidence from the Supermarket Industry," American Economic Review, American Economic Association, vol. 85(3), pages 415-435, June.
    6. 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.
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    Cited by:

    1. Haan, Marco A. & Toolsema, Linda A., 2008. "The strategic use of debt reconsidered," International Journal of Industrial Organization, Elsevier, vol. 26(2), pages 616-624, March.
    2. 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.
    3. Martin, Richard, 2003. "Debt financing and entry," International Journal of Industrial Organization, Elsevier, vol. 21(4), pages 533-549, April.
    4. Abdulaziz Istaitieh & José M. Rodríguez‐Fernández, 2006. "Factor‐product markets and firm's capital structure: A literature review," Review of Financial Economics, John Wiley & Sons, vol. 15(1), pages 49-75.
    5. Takao Ohkawa & Tetsuya Shinkai & Makoto Okamura & Kozo Harimaya, 2012. "Endogenous Determination of the Liability Rule in Oligopolistic Markets," Discussion Paper Series 91, School of Economics, Kwansei Gakuin University, revised Jul 2012.
    6. repec:dgr:rugsom:03e37 is not listed on IDEAS
    7. 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.
    8. 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.
    9. Wang, Kuang-Cheng Andy & Wang, Yi-Jie & Liang, Wen-Jung & Tsai, Ming-Che & Mai, Chao-Cheng, 2016. "Patent licensing under financial structure with limited liability," International Review of Economics & Finance, Elsevier, vol. 46(C), pages 121-135.
    10. Istaitieh, Abdulaziz & Rodriguez-Fernandez, Jose M., 2006. "Factor-product markets and firm's capital structure: A literature review," Review of Financial Economics, Elsevier, vol. 15(1), pages 49-75.
    11. 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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