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Corporate Leverage and Product Differentiation Strategy

  • Stefan Arping

    (University of Amsterdam)

  • Gyöngyi Lóránth

    (University of Cambridge, Cambridge Endowment for Research Finance, and Centre for Economic Policy Research)

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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File URL: http://dx.doi.org/10.1086/505253
File Function: main text
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Article provided by University of Chicago Press in its journal Journal of Business.

Volume (Year): 79 (2006)
Issue (Month): 6 (November)
Pages: 3175-3208

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Handle: RePEc:ucp:jnlbus:v:79:y:2006:i:6:p:3175-3208
Contact details of provider: Web page: http://www.journals.uchicago.edu/JB/

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