Stefan Arping (University of Amsterdam) Gyöngyi Lóránth (University of Cambridge, Cambridge Endowment for Research Finance, and Centre for Economic Policy Research)
Abstract
This article develops a model of the interplay between corporate leverage and product differentiation strategy. Leverage improves managerial discipline, but it can also raise customer concerns about a vendor's long-term viability. We argue that customer concerns about firm viability will be particularly pronounced when products are highly differentiated from competitors' products. In this context, optimal product differentiation strategies solve a trade-off between softening price competition and reducing customers' total cost of ownership. Our analysis is consistent with empirical evidence suggesting a negative correlation between corporate leverage and product uniqueness.
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Publisher Info
Article provided by University of Chicago Press in its journal Journal of Business.
Volume (Year): 79 (2006) Issue (Month): 6 (November) Pages: 3175-3208 Download reference. The following formats are available: HTML
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