Debt as an Entry Deterrent Under Bertrand Price Competition
In recent studies of strategic debt little attention has been paid to the use of debt in deterring potential rivals. I show that in a Bertrand-type industry where costs are uncertain, an incumbent monopolist can deter entry by using debt to commit to a sufficiently low price. If demand is uncertain, deterrence is not possible, and an incumbent will choose positive debt levels to induce 'softer' post-entry competition. The results under demand uncertainty support recent empirical evidence that leverage is negatively associated with output and positively associated with prices
Year of publication: |
1999
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Authors: | Showalter, Dean |
Published in: |
Canadian Journal of Economics. - Canadian Economics Association - CEA. - Vol. 32.1999, 4, p. 1069-1081
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Publisher: |
Canadian Economics Association - CEA |
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