Duopoly innovation with monopoly debater

Purpose – This paper highlights the interaction between innovation and financial structure under duopoly with a monopoly debater. Design/methodology/approach – By game-theory approaches, we characterize effects of debt levels on innovative investment with limited liability effect. Findings – This paper argues that higher debt levels increase both innovative investment and output. Both higher debt rate and higher debt levels act as commitment to reduce opponent firms’ net profits. Net profit for unit debt is reduced with higher debt level and higher debt rate. Originality/value – This study extends Brander and Lewis’s (1986) to innovative situation and no interior point solution is restricted.