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Corporate Leverage and Product Differentiation Strategy

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Author Info
Stefan ARPING
Gyöngyi LÓRÁNTH
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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Publisher Info
Paper provided by Université de Lausanne, Faculté des HEC, DEEP in its series Cahiers de Recherches Economiques du Département d'Econométrie et d'Economie politique (DEEP) with number 02.06.

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Length: 26 pages
Date of creation: Feb 2002
Date of revision: May 2002
Handle: RePEc:lau:crdeep:02.06

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Postal: Université de Lausanne, Faculté des HEC, DEEP, Internef, CH-1015 Lausanne
Phone: ++41 21 692.33.64
Fax: ++41 21 692.33.65
Web page: http://www.hec.unil.ch/deep/publications-english/e-cahiers.htm

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

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Find related papers by JEL classification:
G0 - Financial Economics - - General
L0 - Industrial Organization - - General
M0 - Business Administration and Business Economics; Marketing; Accounting - - General

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