Abstract:

Motivated by the industry practice that two famous Chinese clothing companies respond differently in production quantities as debts increase， how debts affect the pricing and production decisions of a firm with limited liability is investigated. Specifically， the firm simultaneously determines its selling price and production quantity to maximize the expected benefit， which is defined as the positive part of profits minus debts. By comparing the optimal pricing and production decisions under profit maximization and those under benefit maximization， it is found that debts indeed influence the joint decisions. With a low unit production cost， product price increases but production quantity decreases as debts increase. However， with a high unit production cost， both product price and production quantity increase as debts increase. It is further numerically shown that the results hold when demands follow a normal distribution. Our findings provide guidelines for firms with debts and limited liability to set their optimal price and production quantity.

Key words: debt, limited liability, production, pricing