Capacity-Price Competitionand Financial Structure

It is known that the Cournot model of quantity competition has to be inter-preted as the reduced form of a more complex situation, in which firms can commit tocapacity levels prior to setting prices. I show that the optimal strategic debt choice ofcapacity-price competitors depend on the type of uncertainty that exists in the oligopolymarket. The main contribution of the paper is to illustrate a result that is opposite of theCournot outcome in Brander and Lewis (1986) and the Bertrand result in Showalter(1995): in the case of capacity-price competition where the demand conditions are un-certain, firms will use no debt despite the fact that both Bertrand firms and Cournotfirms facing uncertain demand conditions choose positive debt levels.