Abstract
A sudden decrease in demand can require firms to cope with adjustment and selection pressures. Focusing on the firm’s pre-established vertical structure, we examine how a negative demand shock may differentially impact market exit rates of integrated and non- integrated firms. We provide theoretical reasons for advantages and disadvantages of each vertical structure and adopt a research question-based approach to allow the empirical analysis to adjudicate this relationship. Our empirical context is the U.S. medical diagnostic imaging industry (2005-2009), wherein a major legislative reform on Medicare created a derived demand shock. Using a difference-in-differences-in-differences approach, we find that treated integrated manufacturers were more likely to exit product markets post-shock. Our corroborative qualitative insights indicate non-integrated firms were better able to minimize adjustment costs than integrated firms.
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