Oligopoly and financial structure revisited

In this paper we employ a two stage Cournot duopoly model where firms can obtain outside funds only to finance production plans; payouts to shareholders are not allowed. Debt, equity and capacity are chosen in the first stage and output is chosen in the second stage. In contrast to the existing literature in this area, we show firms always choose zero debt in equilibrium. The two important implications of our analysis are (a) while there are linkages between financial structure and product market decisions, these linkages have no real effect on the choice of optimal capital structure of a firm, and (b) the standard results in this area are not robust to model specifications. I am indebted to Eric Maskin for guidance and encouragement. Discussions with Abhijit Banerjee, Sudipto Dasgupta, Peter Eso, Shanto Ghosh, James Friedman, Claudio Mezzetti, Dipankar Sengupta and Kunal Sengupta have been very helpful. I must also thank John Wooders, an editor of this journal and an anonymous referee for an excellent set of comments. The usual disclaimer applies. Citation: Dastidar, Krishnendu, (2003) "Oligopoly and financial structure revisited." Economics Bulletin, Vol. 12, No. 3 pp. 1−12 Submitted: November 13, 2003. Accepted: November 14, 2003. URL: http://www.economicsbulletin.com/2003/volume12/EB−03L10016A.pdf