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Title:The strategic effect of debt in dynamic price competition with fluctuating demand PDF Logo
Authors:Neubecker, Leslie
Issue Date:2002
Series/Report no.:Tübinger Diskussionsbeiträge 250
Abstract:This paper shows that obligations from debt hinder tacit collusion if equity owners are protected by limited liability. In contrast to its advantageous commitment value in short-run competition, leverage reduces profits from infinite interaction. Contrasting uncorrelated shocks with a cyclical demand development, we show that in the first case optimal pricing is anticyclical. With demand cycles, it is anticyclical only if equity holders place a low value on future profits, but procyclical otherwise. In both cases, the cyclicity of prices increases with the debt level. Contrary to traditional wisdom, a lower degree of homogeneity may raise profits of leveraged firms.
Subjects:capital structure
dynamic competition
Persistent Identifier of the first edition:urn:nbn:de:bsz:21-opus-18834
Document Type:Working Paper
Appears in Collections:Tübinger Diskussionsbeiträge, Universität Tübingen

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