FINANCIAL STRUCTURE AND TACIT COLLUSION WITH REPEATED OLIGOPOLY COMPETITION

In this paper it is demonstrated how debt will reduce the ability of an oligopolistic industry to sustain tacit collusion in the context of infinitely repeated Bertrand competition. This is due to the negative incentive effect of debt according to which equity holders will find it profitable to deviate from collusive configurations at lower levels of industry demand as the level of financial leverage increases. The optimal financial structure of an oligopolistic industry depends on the interplay between this negative incentive effect and the tax savings effect (or other strategic effects) of debt financing relative to equity financing.