External Financing and Customer Capital: A Financial Theory of Markups

74 Pages Posted: 8 Mar 2015 Last revised: 26 Dec 2019

See all articles by Winston Dou

Winston Dou

The Wharton School, University of Pennsylvania

Yan Ji

Hong Kong University of Science & Technology (HKUST)

Date Written: December 26, 2019

Abstract

We develop an industry equilibrium model of dynamic games to understand how product markups are determined in the presence of external financing costs, customer capital, and imperfect competition. Firms optimally set markups to balance the tradeoff between profiting from their existing customer base and developing their future customer base. We analytically characterize the equilibrium markups. Firms exhibit strategic complementarity in setting markups, which increases the level of markups and decreases the positive response of markups to a rise in external financing costs. Moreover, the model predicts that greater product market threats lead to more conservative financial policies, which is supported by the data.

Keywords: Markups, Customer base, External financing costs, Oligopoly, Corporate liquidity

JEL Classification: E31, G32, G35, L13

Suggested Citation

Dou, Winston and Ji, Yan, External Financing and Customer Capital: A Financial Theory of Markups (December 26, 2019). Available at SSRN: https://ssrn.com/abstract=2574953 or http://dx.doi.org/10.2139/ssrn.2574953

Winston Dou (Contact Author)

The Wharton School, University of Pennsylvania ( email )

2318 Steinberg Hall - Dietrich Hall
3620 Locust Walk
Philadelphia, PA 19104
United States

Yan Ji

Hong Kong University of Science & Technology (HKUST) ( email )

Clearwater Bay
Kowloon, 999999
Hong Kong

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