Debt as an Entry Deterrent Under Bertrand Price Competition

Dean Showalter

Canadian Journal of Economics, 1999, vol. 32, issue 4, 1069-1081

Abstract: 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

Date: 1999
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