DP3451 Corporate Leverage and Product Differentiation Strategy

Author(s): Stefan Arping, Gyöngyi Lóránth
Publication Date: July 2002
Keyword(s): customer lock-in strategies, innovation, leverage, liquidation costs, product differentiation
JEL(s): G3, L1, L2
Programme Areas: Financial Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=3451

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.