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

  • Magali Costa
  • Cesaltina Pacheco Pires
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Part of the Studies in Big Data book series (SBD, volume 15)

Abstract

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.

Keywords

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

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References

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Copyright information

© Springer International Publishing Switzerland 2015

Authors and Affiliations

  • Magali Costa
    • 1
  • Cesaltina Pacheco Pires
    • 2
  1. 1.CEFAGE-UE and Instituto Politécnico de LeiriaESTGLeiriaPortugal
  2. 2.CEFAGE-UE and Departamento de GestãoUniversidade de ÉvoraÉvoraPortugal

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