Diversified firms on dynamical supply chain cope with financial crisis better

To investigate whether diversification within a supply chain can help middlemen firms survive prolonged financial crises, we simulated an extension of the dynamical supply chain network model by Mizgier et al. (2012) under normal and crisis economic conditions. In these simulations, firms in the middle of the supply chain are allowed to (i) forward vertically integrate by buying over one of its customers, (ii) backward vertically integrate by buying over one of its suppliers, or (iii) horizontally merge with a competitor to pool capital and resources. We extracted from these simulations the lifetime distributions of undiversified firms, and of firms adopting the three diversification strategies described above. We then compare the average lifetimes and the rates at which the midsections and tails of the cumulative lifetime distributions decay for these four types of firms. Based on these comparisons, we found that forward vertical integration most effectively extends the lifetimes of middlemen firms during a financial crisis, but also makes them less resilient to sudden economic downturns. In contrast, backward vertically integrated firms most successfully weather such downturns.