Review of Industrial Organization 23: 179–191, 2003.
© 2004 Kluwer Academic Publishers. Printed in the Netherlands.
How Do Capital Markets Inﬂuence Product Market
MICHAEL H. RIORDAN
Department of Economics and Graduate School of Business, Columbia University, New York, NY
Abstract. This article is the written version of the author’s keynote presentation to the inaugural
International Industrial Organization Conference held in Boston on April 4–5, 2003. It summarizes
selectively a literature on the interaction between the capital and product markets at the nexus of
industrial organization and corporate ﬁnance, and develops two key insights. First, capital market
constraints on an individual ﬁrm are determined at the level of the industry and depend on product
market competition. Second, capital markets constrain the product strategy of ﬁrms and thereby
inﬂuence product market performance.
My title question is a topic at the nexus of industrial organization and corporate
ﬁnance that deserves more attention. Industrial organization mostly has ignored
corporate ﬁnance, and vice versa. But the question undoubtedly is important for
understanding how product markets perform when ﬁrms participating in a mar-
ket are constrained ﬁnancially, and for understanding how capital structure and
corporate governance contribute to product market strategy.
My goal mainly is to spark interest in the topic. Toward this end, I develop
a few key ideas, and comment on some related economics literature. One idea is
that capital market constraints on an individual ﬁrm are determined at the level of
the industry and depend on product market competition. Another idea is that cap-
ital markets constrain the product strategy of ﬁrms and thereby inﬂuence product
Rather than attempt a comprehensive literature survey, I focus on a handful of
articles and papers. For this I apologize to neglected authors. My literature review
is selective, perhaps idiosyncratic, and certainly egotistical as it includes a recent
paper of mine. I hope it at least provides some introduction to the literature.
I begin with a story about the PCS industry. PCS stands for personal communic-
ation services – mainly wireless voice telecommunications. The story, while based
on a public record, draws on my experience as chief economist of the Federal
Communications Commission. It is intended to motivate the idea that ﬁrms com-