Dynamic Pricing Under Debt: Spiraling Distortions and Efficiency Losses

Omar Besbes (), Dan A. Iancu () and Nikolaos Trichakis ()
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Omar Besbes: Graduate School of Business, Columbia University, New York, New York 10027
Dan A. Iancu: Graduate School of Business, Stanford University, Stanford, California 94305
Nikolaos Trichakis: MIT Sloan School of Management, Massachusetts Institute of Technology, Cambridge, Massachusetts 02142

Management Science, 2018, vol. 64, issue 10, 4572-4589

Abstract: Firms often finance their inventory through debt and subsequently sell it to generate profits and service the debt. Pricing of products is consequently driven by inventory and debt servicing considerations. We show that limited liability under debt induces sellers to charge higher prices and to discount products at a slower pace. We find that these distortions result in revenue losses that compound over time, leading to some form of performance spiral down. We quantify the extent to which these inefficiencies can be mitigated by practical debt contract terms that emerge as natural remedies from our analysis, and find debt amortization or financial covenants to be the most effective, followed by debt relief and early repayment options.

Keywords: dynamic pricing; debt; pricing distortions; channel efficiency; firm value; spiral down (search for similar items in EconPapers)
Date: 2018
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

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