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Investment, production and indebtedness in a duopoly with uncertain demand

• Mark Babotan
• Peter Juhasz
• Janos Szaz

(2023). ECMS 2023, 37th Proceedings
Edited by: Enrico Vicario, Romeo Bandinelli, Virginia Fani, Michele Mastroianni, European Council for Modelling and Simulation.
DOI: http://doi.org/10.7148/2023
ISSN: 2522-2422 (ONLINE)
ISSN: 2522-2414 (PRINT)
ISSN: 2522-2430 (CD-ROM)
ISBN: 978-3-937436-80-7
ISBN: 978-3-937436-79-1 (CD) Communications of the ECMS Volume 37, Issue 1, June 2023, Florence, Italy June 20th – June 23rd, 2023

https://doi.org/10.7148/2023-0093

Mark babotan, Peter juhasz, Janos szaz (2023). Investment, Production and Indebtedness in a Duopoly with Uncertain Demand, ECMS 2023, Proceedings Edited by: Enrico Vicario, Romeo Bandinelli, Virginia Fani, Michele Mastroianni, European Council for Modelling and Simulation. doi:10.7148/2023-0093

The paper builds a dynamic and stochastic simulation model to analyse how players’ behaviour changes as the number of competitors increases in the market. Our major contribution is to parallelly use the classic terms of corporate finance and microeconomic models to calculate the necessary quantities for business valuation and the effect of competition on the market. Our general results show that, for several firms, the optimal leverage ratio increases with the number of firms. This is due to the declining cash flows from operations and, in parallel, to the relatively increasing importance of the tax shield effect arising from the capital structure. This paper highlights the importance of considering market structure in financial analysis and modelling. While a monopoly can shape the market individually, firms are constrained to a higher output than the socially optimal in the presence of a competitor. This essentially limits their freedom to make decisions about the capital structure.