EconPapers    
Economics at your fingertips  
 

The Limited Liability Effect in Experimental Duopoly Markets

Jörg Oechssler and Frank Schuhmacher

No 36/2001, Bonn Econ Discussion Papers from University of Bonn, Bonn Graduate School of Economics (BGSE)

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.

Keywords: oligopoly; bankruptcy; debt-equity ratio (search for similar items in EconPapers)
JEL-codes: L13 G33 D43 (search for similar items in EconPapers)
Date: 2001
References: View references in EconPapers View complete reference list from CitEc
Citations: Track citations by RSS feed

Downloads: (external link)
https://www.econstor.eu/bitstream/10419/78420/1/bgse36_2001.pdf (application/pdf)

Related works:
Journal Article: The limited liability effect in experimental duopoly markets (2004) Downloads
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:zbw:bonedp:362001

Access Statistics for this paper

More papers in Bonn Econ Discussion Papers from University of Bonn, Bonn Graduate School of Economics (BGSE) Contact information at EDIRC.
Bibliographic data for series maintained by ZBW - Leibniz Information Centre for Economics ().

 
Page updated 2019-12-13
Handle: RePEc:zbw:bonedp:362001