The role of debt and bankruptcy statutes in facilitating tacit collusion

✍ Scribed by Julie Hunsaker

• Book ID: 101288141
• Publisher: John Wiley and Sons
• Year: 1999
• Tongue: English
• Weight: 179 KB
• Volume: 20
• Category: Article
• ISSN: 0143-6570
• DOI: 10.1002/(sici)1099-1468(199902)20:1<9::aid-mde916>3.0.co;2-#

✦ Synopsis

Using a two-period model this paper examines the quantity decisions of leveraged duopolists that are vulnerable to bankruptcy in the first period. When the firms have symmetric costs, a bankrupt firm reorganizes under Chapter 11. If a Chapter 11 firm experiences marginal cost relief, each firm produces a collusive output in period one in order to prevent its rival's financial demise. When the firms have asymmetric costs, the less efficient firm is liquidated under Chapter 7 upon bankruptcy. A predatory equilibrium exists, whereby the inefficient firm is driven from the market.