A Note on Additional Materials for 'Feedback and Contagion Through Distressed Competition'

Abstract

This note contains a continuous-time version of the full-fledged quantitative model in the paper titled “Feedback and Contagion through Distressed Competition” (Chen et al., 2023a). Section 1 develops the model in continuous time and provides additional discussions on the literature. Section 2 clarifies some technical conditions for the boundary conditions of the continuous-time model. Section 3 provides the numerical algorithm that solves the continuous-time model using a discrete-time dynamic programming method. Moreover, an internet appendix (Chen et al., 2023b) provides empirical evidence supporting the theoretical results, as well as additional analyses of the full-fledged quantitative model.

Keywords: Competition-distress feedback loop, Distress spillover, Predatory pricing, Price war, Profitability-leverage puzzle, Collusion

JEL Classification: C73, D43, E31, G3, L13, O33