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Market Competition and Shock Propagation: Implications for Margins and Distress

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Listed:
  • Winston Wei Dou
  • Shane A. Johnson
  • Wei Wu

Abstract

Using local natural disasters as a quasi-experimental setting, we show that adverse shocks lead both directly affected firms and their unaffected competitors to reduce profit margins by approximately 0.8 percentage points. These reductions stem from intensified market competition, driven by mechanisms including predatory pricing, inventory liquidation, and weakened tacit collusion. As unaffected competitors cut margins nearly one-for-one in response, their financial distress rises significantly, though not directly shocked. Spillover effects are concentrated in tradable industries and those with high entry barriers, large inventories, greater price flexibility, or tight financial constraints, revealing a novel channel for shock propagation across the economy.

Suggested Citation

  • Winston Wei Dou & Shane A. Johnson & Wei Wu, 2025. "Market Competition and Shock Propagation: Implications for Margins and Distress," NBER Working Papers 33463, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:33463
    Note: AP CF EFG IO
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    More about this item

    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms

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