Capital Structure and Entry Deterrence with Multiple Incumbents

Capital Structure and Entry Deterrence with Multiple Incumbents

This paper uses a two-stage Cournot duopoly model with demand uncertainly to examine the strategic role debt plays in deterring a company from entering when a potential entrant can enter one of several markets. We show that as the number of alternative markets available for entry rises, the incumbents’ incentive to use debt as a deterrent falls. Thus, a potential entrant will prefer to have a larger number of alternative markets to enter in order to lower the incumbents’ incentive to take strategic actions against it.

Published by:

The B.E. Journal of Economic Analysis & Policy. Vol. 7. N° 1. 2007

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