Why Increased Firm Competition Can Cause a Spiral of Distress
In many industries, the major providers typically adhere to an implicit consensus to hold prices within a reasonable range, warding off cutthroat competition that could lead to a race to the bottom. This tacit collusion fosters an environment of healthy rivalry, ensuring a balance between market forces. It breaks down, however, when the industry faces financial distress, triggering a spiral of pain all around.
In a new paper titled “Feedback and Contagion Through Distressed Competition,” Wharton finance professor Winston Wei Dou and his co-authors trace “the dangerous spiral between financial distress and competition” that manifests in that setting. Dou’s co-authors are MIT finance professor Hui Chen, University of Hong Kong finance professor Hongye Guo, and Hong Kong University of Science and Technology finance professor Yan Ji. Guo was a Wharton doctoral student when he co-authored the paper.
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