Financial Structure, Product Market Decisions and Default Risk in an Asymmetric Duopoly

Costa, Magali; Pires, Cesaltina Pacheco

http://hdl.handle.net/10400.8/13007

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Authors

Costa, Magali

Pires, Cesaltina Pacheco

Abstract(s)

Financial and output market decisions are crucial to the success or failure of an organization. In this paper we analyze the equilibrium default risk in a two-stage duopoly model with an uncertain environment, where firms decide their financial structure in the first stage of the game and decide their quantities in the second stage of the game. Using numerical analysis, we analyze the impact of changing the asymmetry in the two firms' marginal costs on the equilibrium default risk. Our results show that as a firm becomes less efficient it is optimal to reduce its debt level and the quantity produced. The reverse is true for the more efficient firm. This behavior implies that although higher marginal cost leads to lower profits, the less efficient firm reduces its default probability due to a more cautious behavior in the financial and product market. © Springer International Publishing Switzerland 2015. All rights reserved.

Keywords

Capital structure D43 Default risk jel classification G32 G33 Product market competition

URI

http://hdl.handle.net/10400.8/13007

Citation

Costa, M., Pires, C.P. (2015). Financial Structure, Product Market Decisions and Default Risk in an Asymmetric Duopoly. In: Póvoa, A., de Miranda, J. (eds) Operations Research and Big Data. Studies in Big Data, vol 15. Springer, Cham. https://doi.org/10.1007/978-3-319-24154-8_6