Abstract: The formulation of market competition strategy of enterprise should not only focus on the operational factors of both competitors, but also consider the influence of its capital operation. However, the literature has focused on the interaction between market competition and debt financing, but been silent on the effect of equity financing on market competition. Present study considers two Bertrand retailers, in which one retailer faces good market opportunity and employs equity financing to exploit the market. Its demand function becomes D1=a1－b1p1+γ1p2+β1e, where β1and e represent its growth and effort, respectively. The market development will directly influence the demand of its competitor and change it to D2=a2－b2p2+γ2p1+β2e, where β2 is called as externality of market development. The valuation of financing retailer is set as V, so the equity of its shareholders changes to V/(V+B). Based on these, a Bertrand competition model is constructed under equity financing, and the competition strategy choice and its influencing factors are investigated, such as the principal-agent behavior of shareholders. Additionally, a numerical simulation whose parameters are partly based on the data of Chinese stock market is also present to clearly reveal the competition strategy choice. Core research indicates that retailer’s competition strategy depends on its growth as well as externality of market development. Increasing the growth or enhancing the externality are both able to promote the equity financing of the retailer, while the principal-agent behavior of shareholders could impede it. Additionally,this behavior has effect on the market development decision, though the price competition strategy would not be qualitatively changed. Moreover, the competitor must take actions to avoid falling into the “growth trap of financing enterprise” under negative externality. The results not only contribute to the competition strategy choice of growth enterprise and the exploration of the interaction between market competition and equity financing, but also provide insight into the model research of equity financing from the perspective of enterprise operation.

Key words: market competition; market development; equity financing; principal-agent