Corporate Leverage and Product Differentiation Strategy

26 Pages Posted: 29 Aug 2002

See all articles by Stefan Arping

Stefan Arping

University of Amsterdam Business School; Tinbergen Institute

Gyongyi Loranth

Centre for Economic Policy Research (CEPR)

Multiple version iconThere are 2 versions of this paper

Date Written: July 2002

Abstract

We explore the joint determination of product differentiation strategy and corporate leverage in a setting where (i) product differentiation is valued by customers; (ii) debt is necessary to discipline managers; and (iii) liquidation is costly for customers, in particular, when products are highly differentiated from competitors' products. We show that when managerial incentive problems call for high leverage, firms position their products closer to competitors to reduce deadweight costs customers incur in liquidation. We discuss our findings in light of case study evidence.

Keywords: Leverage, product differentiation, liquidation costs, customer lock-in strategies, innovation

JEL Classification: G3, L1, L2

Suggested Citation

Arping, Stefan and Loranth, Gyongyi, Corporate Leverage and Product Differentiation Strategy (July 2002). Available at SSRN: https://ssrn.com/abstract=325700

Stefan Arping (Contact Author)

University of Amsterdam Business School ( email )

Roetersstraat 18
Amsterdam, 1018WB
Netherlands

Tinbergen Institute ( email )

Burg. Oudlaan 50
Rotterdam, 3062 PA
Netherlands

Gyongyi Loranth

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

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