Businesses of all types struggled as a result of the lockdown measures introduced during the Covid pandemic, but perhaps small, local businesses struggled the most as they lacked the means to shift their trade online overnight.  Nonetheless, research from BerkeleyHaas shows that when it comes to closures, it is the big chains that tended to set the ball rolling and impact smaller businesses.

The study, which was based on cellphone data, found that small firms were most likely to close if they weren’t affiliated with a chain, especially if competing chain outlets in their area shut down.  It’s a finding the researchers refer to as “social learning” as businesses pick up on signals from one another.

The cellphone data allowed the researchers to identify businesses that were open or closed on any particular day between March 1st 2020, which was just before lockdown restrictions were issued, and April 15th 2020, by which time they had been in full swing for a month.

“Many of these directives were ambiguous or not enforced, leaving business owners with latitude to interpret the guidance as they see fit,” the researchers say.

Staying open

The whole situation was riddled with uncertainty, whether in terms of the length of the lockdown measures, the way consumers would react, and the choices that would be made by stores nearby.

“If I’m a small business owner, it’s not so straightforward what I should do,” the researchers explain. “If the big guy stays closed, maybe I can make more money. Conversely, maybe the big guy is better equipped to know” the right response.”

In all, around 230,000 visits to local businesses were recorded in industries and areas where chain outlets operated.  The researchers focused their attention on service-sector businesses, such as gyms, restaurants, and retail shops, but excluded essential outlets, such as gas stations and grocery stores.

Chain reaction

The data showed that if a chain store closed, then there it was 3.5% more likely that a competing business would also close in the same ZIP code the following day.  This may sound like quite a small spike but it quickly accumulates.

“If you accumulate 3.5% across days and establishments and places, it adds up to be a fairly consequential effect in a town that may have hundreds of businesses,” the researchers say.

They argue that the shortage of information about the situation prompted many to look to businesses around them for clues as to the situation.  What’s more, it’s a situation that is likely to continue if local governments continue to balk at issuing vaccine mandates as it will prompt businesses to make their own decisions, which will have a ripple effect on those around them.  The data suggests that most would choose to follow suit if big players decide to require vaccines for entry.

“Perhaps most importantly,” the authors concluded, “this paper shows that when government directives and health guidelines are ambiguous, firms will look for other information to guide their decision making. Obviously, such ambiguity may have been intentional if local governments believe that firms are well positioned to make these important decisions. But if one assumes that this is not the case, policy makers and local governments should consider the consequences of a lack of clarity and precision in their directives.”