Bankruptcy and Supply: A Two-Way Street

Paper Type:  Essay
Pages:  3
Wordcount:  594 Words
Date:  2023-06-06

Financial distress tends to alter the product market competition and the relationship between the supplier and the buyer. The effects of supplier bankruptcy are predation, bail-out, and abetment, which all change the behavior of the firm (Yang et al., 2015). In bankruptcy, the supplier declares their inability to meet the financial obligations of their buyers and go ahead to obtain protection from creditors. There is a Two Way Street in the interaction between bankruptcy and supply in that potential bankruptcy of a firm could influence their performance and decisions of the other parties in the supply chain.

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The predation effect is such that there is increased competition. It is such that the non-distressed competitor behaves like they have some advantage that could benefit the supplier with price control. Critical suppliers need to be treated as such (Yang et al., 2015). They are not interchangeable; that means that there are severe consequences of losing the relationship. Even when it is possible to replace the supplier, there is no guarantee that a transition would be seamless.

In the case of two firms based in different countries and compete in the global market, predation is such that there is a difference if the two companies face financial distress when one is operating in a jurisdiction where reorganization is costless while another where it is costly. This way, the firm with costless restructuring will behave like the non-distressed competitor hence has a competitive advantage over the other firm.

Bail-out Effect

The bail-out effect reflects the incentives of the other supplier to grant the distressed firm concessions that preserve competition. It leads to the improvement of the supply chain efficiency and also provides support for exclusivity (Yang et al., 2015). The extension of financial assistance to a company in the form of loans, cash, bonds, or stock purchases can end up hurting it more than helping.

The effect is such that even when the company is granted more concessions for reorganization, they become even more costly because the growth of the concessions is not in line with the cost of restructuring. The non-distressed firm, in turn, benefits from the reorganization. In cases where the cost of reorganization keeps increasing, the dominating force becomes the benefit. Bankruptcy thus affects the supply chain by making it costly to reorganize when there is bail-out from other non-distressed companies.

Abetment Effect

The abetment effect is where the supplier could deliberately abet the predation of the competitor. This way, it leads to increased operational disadvantages for the distressed firm. The supplier benefits from the predation effect, which then provides an incentive for abetting the predatory behavior of the non-distressed firm hence pushes the distressed firm into bankruptcy (Yang et al., 2015). The bankruptcy affects the firm where other suppliers want to profit more from the financial distress of one firm. This way, the distressed firm is pushed further into bankruptcy, and consumers get harmed in the process. The non-distressed firm seeks to benefit from the bankruptcy of the distressed firm.

In conclusion, supplier bankruptcy is critical to the organization, and they need to strategize on ensuring financial health. It is necessary for firms to have consistent and systematic ways to monitor their financial viability. Companies should work with their suppliers to ensure that they continuously collaborate and discuss ways to help the business succeed. It is also crucial to consider the transparency of financial viability for a healthy relationship.


Yang, S. A., Birge, J. R., & Parker, R. P. (2015). The supply chain effects of bankruptcy. Management Science, 61(10), 2320-2338. Retrieved from

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Bankruptcy and Supply: A Two-Way Street. (2023, Jun 06). Retrieved from

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