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The Economic Research Institute, Stockholm School of Economics SSE/EFI Working Paper Series in Economics and Finance

No 45:
Oligopoly and Limited Liability

Marcus Asplund

Abstract: This paper studies the strategic interaction on oligopolistic markets where firms have debt obligations. For sufficiently high (low) quantities (prices) of the competitors there exists no unique strategy that maximise equity holders payoff, since whatever quantity (price) an indebted firms sets, operating profits will not cover debt. The result is an infinite number of weak, and not necessarily any strict, Nash equilibria. Howqever, many of these involve weakly dominated strategies. For low debt levels, there ixist a unique strict N.E., which is the only strategy to survive iterated elimination of ewakly dominated strategies. For high debt levels, it is only possible to give upper and lower bounds of the surviving strategies. Generally, the bounds of the surviving strategies (prices or quantities) are increasing in debt levels. The analysis substantially generalises earlier work and provides some new insights into the relation between financial structure and product market behaviour.

Keywords: Limited liability; oligopoly; weakly dominated strategies; (follow links to similar papers)

JEL-Codes: C72; D43; G33; L13; (follow links to similar papers)

27 pages, January 1995

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