Financial Innovations, Market Completion, andImperfect Product Market Competition:Some Preliminary Results

We consider how the introduction of financial innovations may affect the intensity of productmarket competition. When rival firms issue debt, their product market behavior is driven by strategic con-siderations that are different from the ones in the case of pure equity financing. In particular, we analyzehow “implicit” collusion among firms by external debt financing will be made more difficult by theenlargement of firms’ financing possibilities via financial innovations. Up to now, this effect has not beensufficiently recognized in the literature. Therefore, we present two examples demonstrating in which wayadditional financing opportunities will render implicit collusion impossible.