Working Paper: CEPR ID: DP3451
Authors: Stefan Arping; Gyngyi Loranth
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.
Keywords: customer lock-in; strategies; innovation; leverage; liquidation costs; product differentiation
JEL Codes: G3; L1; L2
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| high leverage (G19) | degree of product differentiation (L15) |
| high leverage (G19) | position products closer to competitors (L19) |
| increase in liquidation costs (G33) | position products closer to competitors (L19) |
| increase in liquidation costs (G33) | degree of product differentiation (L15) |
| managerial incentive problems necessitate high leverage (G32) | high leverage (G19) |