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Endogenous market structures and the optimal financial structure

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We characterize the optimal financial structure as a strategic device to optimize the value of a firm competing in a market where entry is endogenous. Debt financing is always optimal under quantity competition, and, contrary to the Brander-Lewis-Showalter results based on duopolies, we show the optimality of moderate debt financing also under price competition with cost uncertainty (but not with demand uncertainty). We derive the formulas for the optimal financial structure, which does not affect the strategies of the other firms but reduces their number.

Keywords: G31; G32; L11

Document Type: Research Article


Affiliations: Department of Economics, Ca'Foscari, University of Venice

Publication date: November 1, 2010

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