The effects of long-term debt on a firm's new product pricing policy in duopolistic markets

While many marketing models ignore the influence of financial variables on a firm's marketing strategy, this article explores the effect of debt on th e profit maximizing price for a new product. We assume a duopolistic market structure in which two firms produce a heterogeneous new consumer durable that is sold over two different periods. Firms know market demand in the fi rst period with certainty, while demand in the second period is uncertain. Moreover,firms have free access to the capital market and finance part of t heir operating costs by issuing long-term debt. In this setting, we study t he influence of long-term debt on firms' pricing policies. It turns out tha t leveraged firms compared to unleveraged ones have different pricing strat egies. In particular,first-period prices are lower and second-period prices are higher in case of long-term debt than in the case of no leverage. Fina lly we find that prices for firms that take on debt ale less volatile than prices for purely equity-financed firms. (C) 2000 Elsevier Science Inc. All rights reserved.