Debt as a collusive device in an oligopoly supergame |
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Authors: | Dick Damania |
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Institution: | (1) Present address: School of Economics, The Flinders University of South Australia, GPO Box 2100, 5001 Adelaide, SA, Australia |
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Abstract: | This paper explores the impact of debt holdings on the output decisions of firms in an oligopoly supergame with stochastic demand fluctuations. It is demonstrated that when perfect collusion is not feasible then there exist circumstances in which increased debt holdings may facilitate tacit collusion. This occurs because higher debt levels act as a credible commitment device which lowers the payoffs accruing to a firm when it defects from the tacitly collusive equilibrium. It is further shown that in these circumstances firms may have an incentive to hold debt for strategic purposes which promote collusion. |
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Keywords: | repeated oligopoly game financial structure |
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