Pricing strategy and financial policy

Recent empirical evidence indicates that capital structure changesaffect pricing strategies. In most cases, prices increase followingthe implementation of a leveraged buyout of a major firm inan industry, with the more leveraged firm in the industry charginghigher prices on average. Notable exceptions exist, however,when the leverage increasing firm's rival is relatively unlevered.The first observation is consistent with a model where firmscompete for market share on the basis of price. The second observationcan be explained within the context of a Stackelberg model wherethe relatively unlevered rival acts as the Stackelberg priceleader.