Endogenous market structures and the optimal financial structure

Endogenous market structures and the optimal financial structure

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Article ID: iaor20106983
Volume: 43
Issue: 4
Start Page Number: 1333
End Page Number: 1352
Publication Date: Nov 2010
Journal: Canadian Journal of Economics/Revue canadienne d'conomique
Authors:
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.

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