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Product flexibility of competitive manufactures: the effect of debt financing

Author

Listed:
  • Guozhao Cao

    (Shanxi University)

  • Zhan Wang

    (Shanxi University)

Abstract

The goal of this paper was to examine the effect of debt financing on competitive manufactures’ product flexible capacity decisions. For this purpose, two competing firms were considered to invest in product flexible capacity and product dedicated capacity, respectively, each of them produced two products. Before investing in the capacity, each firm issues the optimal amount of debt. The product flexible capacity decision models of both levered firms and unlevered firms were built based on the competitive newsvendor model. Then the relationship between debt financing and product flexibility decision was discussed. The results indicated that under the competitive setting, the level of product flexibility decreased with debt as well as the difference of demand between the two products. Furthermore, the optimal capacity investment and debt of levered firms decreased with product flexibility. Finally, the firm could benefit from higher debt and total capacity investment when the product profit margin is large.

Suggested Citation

  • Guozhao Cao & Zhan Wang, 2021. "Product flexibility of competitive manufactures: the effect of debt financing," Annals of Operations Research, Springer, vol. 307(1), pages 53-74, December.
    • Handle: RePEc:spr:annopr:v:307:y:2021:i:1:d:10.1007_s10479-021-04132-x
    DOI: 10.1007/s10479-021-04132-x
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    References listed on IDEAS

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    3. Zhengyu Ren & Hsing Hung Chen & Kunseng Lao & Hongyi Zhang, 2022. "A Decision Support System to Estimate Green Sustainability from Environmental Protection and Debt Financing Indicators," Agriculture, MDPI, vol. 12(8), pages 1-13, August.

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