Weathering a Demand Shock: The Impact of Prior Vertical Scope on Post-shock Firm Response

Lim, N., Kim, S., & Agarwal, R. (2022). Weathering a Demand Shock: The Impact of Prior Vertical Scope on Post-shock Firm Response. Forthcoming at Strategic Management Journal

48 Pages Posted: 13 Sep 2022 Last revised: 1 Dec 2022

See all articles by Najoung Lim

Najoung Lim

University of Melbourne - Melbourne Business School

Seojin Kim

University of Maryland, Robert H. Smith School of Business

Rajshree Agarwal

University of Maryland - Robert H. Smith School of Business

Date Written: September 6, 2022

Abstract

We examine how and why pre-existing vertical scope may cause differences in
product market exit rates after sudden and exogenous decreases in demand. Our empirical context is the U.S. medical diagnostic imaging industry (2004-2009), wherein a major Medicare reform created a derived demand shock to equipment manufacturers. Using a difference-in-difference-in-difference design, we find integrated firms were more likely to exit than nonintegrated firms. Building on the literature conceptualizing firms’ pre-shock vertical scope as a representation of existing resources and governance choices, we explain that integrated and nonintegrated firms responded differently by leveraging their own distinctive capabilities. Our qualitative insights suggest that higher market exit of integrated firms was driven by their higher adjustment costs due to frictions across strategies for demand management vs. cost reduction.

Keywords: demand shock, vertical scope, market exit, medical diagnostic imaging, Medicare reform

Suggested Citation

Lim, Najoung and Kim, Seojin and Agarwal, Rajshree, Weathering a Demand Shock: The Impact of Prior Vertical Scope on Post-shock Firm Response (September 6, 2022). Lim, N., Kim, S., & Agarwal, R. (2022). Weathering a Demand Shock: The Impact of Prior Vertical Scope on Post-shock Firm Response. Forthcoming at Strategic Management Journal, Available at SSRN: https://ssrn.com/abstract=4211965 or http://dx.doi.org/10.2139/ssrn.4211965

Najoung Lim (Contact Author)

University of Melbourne - Melbourne Business School ( email )

200 Leicester Street
Carlton, Victoria 3053 3186
Australia

Seojin Kim

University of Maryland, Robert H. Smith School of Business ( email )

College Park, MD
United States

Rajshree Agarwal

University of Maryland - Robert H. Smith School of Business ( email )

College Park, MD 20742-1815
United States

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