Examining the interaction of marketing and financing decisions in a dynamic environment

The market success of a new product critically depends on the marketing strategy that is adopted during the introductory phase of its life cycle. The decision theoretic marketing literature provides useful insights to this problem through the application of new product diffusion models. While most of the diffusion models incorporate only marketing variables such as price or advertising into the adoption rates of the new product, we introduce the issue of financial decision making and argue that the success of a new product not only depends on an optimal marketing mix strategy but also on the financial decisions of a firm. We adopt a simple diffusion model and show that in case with demand uncertainty and limited liability more leverage (a higher debt equity ratio) causes the firm to be more aggressive in the product market, i.e., to reduce the price of the product. Our findings suggest that marketing decisions should not be taken in isolation but should be coordinated with financial variables.