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Endogenous market structures and the optimal financial structure

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  • Federico Etro

Abstract

We characterize the optimal financial structure as a strategic device to optimize the value of a firm competing in a market where entry is endogenous. Debt financing is always optimal under quantity competition, and, contrary to the Brander‐Lewis‐Showalter results based on duopolies, we show the optimality of moderate debt financing also under price competition with cost uncertainty (but not with demand uncertainty). We derive the formulas for the optimal financial structure, which does not affect the strategies of the other firms but reduces their number. On caractérise la structure financière optimale comme un dispositif stratégique pour optimiser la valeur d’une entreprise concurrençant dans un marché où l’entrée est endogène. Le financement de la dette est toujours optimal dans un régime de concurrence par les quantités, et, contrairement aux résultats de Brander‐Lewis‐Showalter pour les duopoles, on montre qu’il y a optimalité aussi du financement d’une dette modérée dans un régime de concurrence par les prix quand il y incertitude des coûts (mais pas incertitude de la demande). On dérive les formules pour la structure financière optimale, qui n’affecte pas les stratégies des autres entreprises mais réduit leur nombre.

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  • Federico Etro, 2010. "Endogenous market structures and the optimal financial structure," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 43(4), pages 1333-1352, November.
    • Handle: RePEc:wly:canjec:v:43:y:2010:i:4:p:1333-1352
    DOI: 10.1111/j.1540-5982.2010.01616.x
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    Cited by:

    1. Federico Etro, 2014. "The Theory Of Endogenous Market Structures," Journal of Economic Surveys, Wiley Blackwell, vol. 28(5), pages 804-830, December.
    2. Etro, Federico, 2011. "Endogenous market structures and contract theory: Delegation, principal-agent contracts, screening, franchising and tying," European Economic Review, Elsevier, vol. 55(4), pages 463-479, May.
    3. Tetsuya Shinkai & Takao Ohkawa & Makoto Okamura & Kozo Harimaya, 2015. "Strategic Delegation of Indebted Firms in a Duopoly with Uncertain Demand," Discussion Paper Series 135, School of Economics, Kwansei Gakuin University, revised Sep 2015.
    4. Hiroaki Ino & Akira Miyaoka, 2016. "Government-induced Production Commitment in the Open Economy," Discussion Paper Series 142, School of Economics, Kwansei Gakuin University, revised May 2016.
    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. Cato, Susumu & Oki, Ryoko, 2011. "The top-dog and the lean and hungry look strategies in endogenous entry," Economic Modelling, Elsevier, vol. 28(6), pages 2776-2782.
    7. Tetsuya Shinkai & Takao Ohkawa & Makoto Okamura & Kozo Harimaya, 2012. "Delegation and Limited Liability in a Modern Capitalistic Economy," Discussion Paper Series 87, School of Economics, Kwansei Gakuin University, revised Apr 2012.

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    More about this item

    JEL classification:

    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms

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