Decoding the Influence of Financial Constraints on Retail Product Strategies During Economic Cycles in the U.S

This paper examines the adjustment margins employed by firms encountering financial constraints during the Great Recession. Specifically, the study focuses on the changes in product entry and exit, as well as the components of sales variation. To conduct the research, I use Nielsen Homescan, GS1, and Compustat datasets, and employ panel estimation techniques. The results of the study reveal the following stylized facts: (i) firms with lower liquidity constraints, as measured by a higher ratio of liquid assets to total assets, tend to introduce new products during the Great Recession, with an average increase of approximately 2% on the net entry rate; (ii) adjustments in product-specific yearly sales percentage changes are primarily driven by changes in prices, with sales remaining constant while prices increase by approximately 1% without a statistically significant shift in the customer base or quantities. These responses exhibit heterogeneity across the quality distribution, with financially constrained firms increasing prices on lower-quality products by 1.8% while reducing prices on high-quality products by approximately 7% in order to attract customers trading down and exploit locked-in customers purchasing lower-quality varieties. These findings provide insight into the role of creative destruction in economic activity during downturns and shed light on the sources of changes in sales by their components