Pricing Strategy and Financial Policy

56 Pages Posted: 16 Jul 2000 Last revised: 30 Sep 2010

See all articles by Sudipto Dasgupta

Sudipto Dasgupta

Chinese University of Hong Kong, Lancaster University, and CEPR

Sheridan Titman

University of Texas at Austin - Department of Finance; National Bureau of Economic Research (NBER)

Multiple version iconThere are 2 versions of this paper

Date Written: March 1996

Abstract

Recent empirical evidence indicates that capital structure changes affect pricing strategies. In most cases, prices increase following the implementation of a leveraged buyout of a major firm in an industry, with the more levered firm charging higher prices on average. Notable exceptions exist when rival firms are relatively unlevered. The first observation is consistent with a relatively simple model where firms compete for market share on the basis of price. To explain the second observations (i.e. the exceptions) the model must be extended to allow for reputation effects related to product quality. The extended model illustrates how product market imperfections in combination with high leverage can make firms vulnerable to predatory pricing.

Suggested Citation

Dasgupta, Sudipto and Titman, Sheridan, Pricing Strategy and Financial Policy (March 1996). NBER Working Paper No. w5498. Available at SSRN: https://ssrn.com/abstract=225525

Sudipto Dasgupta (Contact Author)

Chinese University of Hong Kong, Lancaster University, and CEPR ( email )

CUHK, Cheng Yu Tung Building, Room 1224
Shatin, NT
Hong Kong
Hong Kong

Sheridan Titman

University of Texas at Austin - Department of Finance ( email )

Red McCombs School of Business
Austin, TX 78712
United States
512-232-2787 (Phone)
512-471-5073 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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