The strategic effect of debt in dynamic price competition with fluctuating demand

Leslie Neubecker

No 250, Tübinger Diskussionsbeiträge from University of Tübingen, School of Business and Economics

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.

Keywords: capital structure; dynamic competition; collusion; Preiswettbewerb; Kapitalstruktur; Kollusion (search for similar items in EconPapers)
JEL-codes: C73 E32 G32 L13 L41 (search for similar items in EconPapers)
Date: 2002
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Citations: View citations in EconPapers (6)

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Persistent link: https://EconPapers.repec.org/RePEc:zbw:tuedps:250

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