corporate financing and product market competition: an...

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WORKING PAPER no. 18 Corporate Financing and Product Market Competition: An Overview Giacinta Cestone April 1999 DIPARTIMENTO DI SCIENZE ECONOMICHE - UNIVERSITÀ DEGLI STUDI DI SALERNO Via Ponte Don Melillo - 84084 FISCIANO (SA) Tel. 089-96 3167/3168 - Fax 089-96 3169 – e-mail: [email protected]

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Page 1: Corporate Financing and Product Market Competition: An ...dlibug/ups/rdf/remo/sef/csefwp/wp18.pdf · 1. Introduction 2. The basic model 3. The long purse story 4. Strategic security

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WORKING PAPER no. 18

Corporate Financing and Product

Market Competition: An Overview

Giacinta Cestone

April 1999

DIPARTIMENTO DI SCIENZE ECONOMICHE - UNIVERSITÀ DEGLI STUDI DI SALERNO

Via Ponte Don Melillo - 84084 FISCIANO (SA)

Tel. 089-96 3167/3168 - Fax 089-96 3169 – e-mail: [email protected]

Page 2: Corporate Financing and Product Market Competition: An ...dlibug/ups/rdf/remo/sef/csefwp/wp18.pdf · 1. Introduction 2. The basic model 3. The long purse story 4. Strategic security

CSEF WORKING PAPER no. 18

Corporate Financing and Product

Market Competition: An Overview*

Giacinta Cestone**

Abstract

This paper offers an overview of the main interactions between corporatefinancing decisions and product market competition. Financial policy mayaffect the market game in several ways. It can make a firm more or lessvulnerable to predation, commit the firm to a particular market strategy, orconvey signals to the firm's competitors. Financial policy matters also in thatthe decision to resort to a common lender can facilitate collusion amongcompeting firms. Finally, an appropriate design of financial claims cancommit the lender not to provide potential entrants with funding or expertise.

Keywords: Capital Structure, Product Markets

JEL classification: G30, L13

* This work has greatly benefitted from the comments and suggestions of GiovanniCespa, Tullio Jappelli, Marco Pagano, Michele Polo and Lucy White.

** GREMAQ, Université de Toulouse and Università Cattolica di Milano.

Address for correspondence: Giacinta Cestone, GREMAQ, Université deToulouse, Manufacture des Tabacs, 21 allée de Brienne, 31000 Toulouse, France.Tel.: +33-5-61128565. E-mail: [email protected]

Page 3: Corporate Financing and Product Market Competition: An ...dlibug/ups/rdf/remo/sef/csefwp/wp18.pdf · 1. Introduction 2. The basic model 3. The long purse story 4. Strategic security

2

Table of contents

1. Introduction

2. The basic model

3. The long purse story

4. Strategic security design

4.1. The optimal financial response to predation

4.2. Financial contracts as strategic commitments

4.3. Capital structure and tacit collusion

5. Finance and the nature of competition

6. Simultaneous signalling to capital and product market

7. The role of the lender in the product market

7.1 Common lender as a coordination device

7.2 Anti-competitive financial contracts

8. Conclusion

References

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Page 13: Corporate Financing and Product Market Competition: An ...dlibug/ups/rdf/remo/sef/csefwp/wp18.pdf · 1. Introduction 2. The basic model 3. The long purse story 4. Strategic security

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Page 14: Corporate Financing and Product Market Competition: An ...dlibug/ups/rdf/remo/sef/csefwp/wp18.pdf · 1. Introduction 2. The basic model 3. The long purse story 4. Strategic security

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Page 26: Corporate Financing and Product Market Competition: An ...dlibug/ups/rdf/remo/sef/csefwp/wp18.pdf · 1. Introduction 2. The basic model 3. The long purse story 4. Strategic security

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Page 27: Corporate Financing and Product Market Competition: An ...dlibug/ups/rdf/remo/sef/csefwp/wp18.pdf · 1. Introduction 2. The basic model 3. The long purse story 4. Strategic security

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Page 31: Corporate Financing and Product Market Competition: An ...dlibug/ups/rdf/remo/sef/csefwp/wp18.pdf · 1. Introduction 2. The basic model 3. The long purse story 4. Strategic security

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Page 32: Corporate Financing and Product Market Competition: An ...dlibug/ups/rdf/remo/sef/csefwp/wp18.pdf · 1. Introduction 2. The basic model 3. The long purse story 4. Strategic security

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