Abstract
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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