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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.

Suggested Citation

  • Sudipto Dasgupta & Sheridan Titman, 1996. "Pricing Strategy and Financial Policy," NBER Working Papers 5498, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:5498
    Note: CF IO
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    References listed on IDEAS

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    More about this item

    JEL classification:

    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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