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Pricing Strategy and Financial Policy

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  • Sudipto Dasgupta
  • Sheridan Titman

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.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 5498.

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Date of creation: Mar 1996
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Publication status: published as Review of Financial Studies (1998).
Handle: RePEc:nbr:nberwo:5498

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  1. Chong-en Bai & Shan Li, 1994. "Capital Structure and Product Market Strategy," Boston College Working Papers in Economics, Boston College Department of Economics 279., Boston College Department of Economics.
  2. James A. Brander & Tracy R. Lewis, 1988. "Bankruptcy Costs and the Theory of Oligopoly," Canadian Journal of Economics, Canadian Economics Association, Canadian Economics Association, vol. 21(2), pages 221-43, May.
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  5. Phillips, Gordon M., 1995. "Increased debt and industry product markets An empirical analysis," Journal of Financial Economics, Elsevier, Elsevier, vol. 37(2), pages 189-238, February.
  6. Bolton, Patrick & Scharfstein, David S, 1990. "A Theory of Predation Based on Agency Problems in Financial Contracting," American Economic Review, American Economic Association, American Economic Association, vol. 80(1), pages 93-106, March.
  7. Jensen, Michael C. & Meckling, William H., 1976. "Theory of the firm: Managerial behavior, agency costs and ownership structure," Journal of Financial Economics, Elsevier, Elsevier, vol. 3(4), pages 305-360, October.
  8. Klemperer, Paul, 1987. "Markets with Consumer Switching Costs," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 102(2), pages 375-94, May.
  9. Titman, Sheridan, 1984. "The effect of capital structure on a firm's liquidation decision," Journal of Financial Economics, Elsevier, Elsevier, vol. 13(1), pages 137-151, March.
  10. Chevalier, Judith A & Scharfstein, David S, 1996. "Capital-Market Imperfections and Countercyclical Markups: Theory and Evidence," American Economic Review, American Economic Association, American Economic Association, vol. 86(4), pages 703-25, September.
  11. Jeremy I. Bulow & John Geanakoplos & Paul D. Klemperer, 1983. "Multimarket Oligopoly," Cowles Foundation Discussion Papers, Cowles Foundation for Research in Economics, Yale University 674, Cowles Foundation for Research in Economics, Yale University.
  12. Showalter, Dean M, 1995. "Oligopoly and Financial Structure: Comment," American Economic Review, American Economic Association, American Economic Association, vol. 85(3), pages 647-53, June.
  13. Kaplan, Steven, 1989. "The effects of management buyouts on operating performance and value," Journal of Financial Economics, Elsevier, Elsevier, vol. 24(2), pages 217-254.
  14. Froot, Kenneth A & Klemperer, Paul D, 1989. "Exchange Rate Pass-Through When Market Share Matters," American Economic Review, American Economic Association, American Economic Association, vol. 79(4), pages 637-54, September.
  15. Chevalier, Judith A, 1995. " Do LBO Supermarkets Charge More? An Empirical Analysis of the Effects of LBOs on Supermarket Pricing," Journal of Finance, American Finance Association, American Finance Association, vol. 50(4), pages 1095-1112, September.
  16. Maksimovic, Vojislav, 1990. " Product Market Imperfections and Loan Commitments," Journal of Finance, American Finance Association, American Finance Association, vol. 45(5), pages 1641-53, December.
  17. Opler, Tim C & Titman, Sheridan, 1994. " Financial Distress and Corporate Performance," Journal of Finance, American Finance Association, American Finance Association, vol. 49(3), pages 1015-40, July.
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