Finance and Product Markets

The nature of product market competition and its influence on firms’ decisions have a long history in economics. Competition was discussed by Adam Smith in The Wealth of Nations. George Stigler received the Nobel Prize in 1982 for his seminal studies of industrial structure, the functioning of markets, and the causes and effects of public regulation. This long-standing interest stems from a simple fact: firms do not operate in isolation but interact within product markets. These interactions delineate the boundaries of markets, shape market dynamics, and determine the resulting intensity of competition. Inspired by these ideas, finance scholars have increasingly recognized and integrated the relevance of product market interactions when studying firms’ decisions and outcomes. This integration has broadened the scope of finance by linking firms’ financial policies to the strategic environment in which they sell products, compete with rivals, and respond to changes in market structure.

A central insight emerging from four decades of research connecting product markets to finance is that competitive interactions are central to understanding firms’ financial decisions and outcomes. They influence firms’ ability to obtain financing, affect their investment, acquisition, hiring, and innovation choices, shape organizational and governance structures, and have implications for risk and asset prices. Firms’ decisions are not only affected by their product market environment. They also directly shape the structure of markets and the resulting competition, or the lack of it. In Fresard and Phillips (2024), we review this large literature and highlight its richness, complexity, and transversality. It builds on several fundamental economic forces and focuses on a wide range of corporate decisions and outcomes. Its conclusions are often nuanced and depend on the setting. This is hardly surprising given the multifaceted nature of product market interactions and the multiplicity of potential forces at play. The same change in competition may affect firms differently depending on financing frictions, market power, information asymmetries, labor mobility, or the organization of capital providers.