The liquidation value of productive assets and product differentiation

Purpose This study aims to investigate the role of the secondary market for productive assets when firms compete in product differentiation. While it benefits firms by softening competition, the risk of asset relocation following bankruptcy reduces the incentive for product differentiation. Design/methodology/approach This study develops a theoretical model integrating horizontal product differentiation with secondary market outcomes for productive assets. Findings The choice of product differentiation is critically determined by entry cost in the industry, redeployment costs following productive asset acquisition and by the number of potential buyers in the secondary market. Research limitations/implications As the results are derived from a theoretical model with two incumbents, future research could assess their robustness in settings with multiple firms and validate the predicted link between secondary-market liquidity and product differentiation empirically. Practical implications Regulatory interventions that promote liquidity in the secondary market for productive assets or lower entry barriers increase product variety, with implications for competition and antitrust policy. Originality/value This study provides novel insights into the relation between product market competition and post-distress asset reallocation. The findings enhance the understanding of how potential entry through acquisition of productive assets in the secondary market affects incumbent firms’ choice on product differentiation.