Volume 57, Number 1, January-February 2023
|Page(s)||201 - 218|
|Published online||15 February 2023|
Debt financing in a duopoly with asymmetric costs
Nankai University, Business School, 121 Baidi Road, 300071 Tianjin, China
* Corresponding author: firstname.lastname@example.org
Accepted: 17 January 2023
This paper examines the strategic use of debt financing in a quantity-setting duopoly with asymmetric costs. Before output competition (Cournot or Stackelberg) with demand uncertainty takes place, both firms can strategically choose to issue debt to commit to an aggressive output stance. We find that the strategic use of debt, serving as a commitment device, can help the disadvantaged firm (i.e., the high-cost firm in Cournot competition or the follower firm in Stackelberg competition) to leapfrog its superior rival in product market competition. Moreover, in light of the substitution between first-mover advantage and the commitment advantage of debt financing, when the order of firms’ moves in output is endogenously determined, in a sizable parameter region, there exists a Pareto-dominant equilibrium that the high-cost firm acts as the Stackelberg leader.
Mathematics Subject Classification: 91B38 / 91A80
Key words: Strategic debt / demand uncertainty / cost asymmetry / quantity competition / first-mover and second-mover advantage
© The authors. Published by EDP Sciences, ROADEF, SMAI 2023
This is an Open Access article distributed under the terms of the Creative Commons Attribution License (https://creativecommons.org/licenses/by/4.0), which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited.
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