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 paper explores the effect of debt on the 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 first period with certainty, while demand in the second period is uncertain. Moreover, firms have free access to the capital market and finance part of their operating costs by issuing long-term debt. In this setting, we study the influence of long-term debt on firms' pricing policies. It turns out that leveraged firms compared to unleveraged ones have different pricing strategies. In particular, first-period prices are lower and second-period prices are higher in case of long-term debt than in case of no leverage. Finally we find that prices for firms that take on debtare less volatile than prices for purely equity financed firms.