Financial Structure and Product Qualities

Stylianos Perrakis (), Christos Constantatos and Jean Lefoll ()
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Jean Lefoll: HEC, University of Geneva

Discussion Paper Series from Department of Economics, University of Macedonia

Abstract: We examine the interaction between financial and microeconomic decisions in a differentiated duopoly where additional willingness-to-pay for high quality is uncertain. Product specification is endogenous. We consider two three-stage games, according to the order of moves: qualities-financial structure-prices and financial structure-qualities-prices. Once debt is contracted, the manager maximizes equity instead of total value. We find that in both games debt a) increases both prices and qualities but most likely reduces product differentiation due to rival quality response; b) reduces the value of the levered high quality firm because it increases the low quality. Moreover, c) the cost of debt is higher for the second game, implying that it is higher for projects using debt to finance a product’s development-cumcommercialization compared to those financing only the commercialization stage.

Keywords: Vertical differentiation; uncertainty; financial structure; leverage; sequential quality choice. (search for similar items in EconPapers)
JEL-codes: G32 L00 (search for similar items in EconPapers)
Date: 2008-12, Revised 2008-12
New Economics Papers: this item is included in nep-bec
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