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Corporate Leverage and Product Differentiation Strategy

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  • Arping, Stefan
  • Lóránth, Gyöngyi

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.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 3451.

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Date of creation: Jul 2002
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Handle: RePEc:cpr:ceprdp:3451

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Keywords: customer lock-in strategies; innovation; leverage; liquidation costs; product differentiation;

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