Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/78420
Authors: 
Oechssler, Jörg
Schuhmacher, Frank
Year of Publication: 
2001
Series/Report no.: 
Bonn Econ Discussion Papers 36/2001
Abstract: 
Brander and Lewis argue in a seminal paper (AER, 1986) that a firm's debt-equity ratio should have important strategic effects on product market competition. We test their model in a duopoly experiment under both, Bertrand and Cournot competition. We find that leverage has strategic effects, but those effects are much weaker than predicted by theory. Specifically, we find for price competition a general tendency towards collusion, which has the same overall consequences - but deviates from - the subgame perfect equilibrium prediction. With quantity competition subjects choose much less debt than predicted by theory. It appears that subjects recognize the strategic effects of their own debt. However, they do not (want to) acknowledge possible strategic advantages of opponents' debt.
Subjects: 
oligopoly
bankruptcy
debt-equity ratio
JEL: 
L13
G33
D43
Document Type: 
Working Paper

Files in This Item:
File
Size





Items in EconStor are protected by copyright, with all rights reserved, unless otherwise indicated.