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The Behaviour of Declining Industries

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  • STEPHEN P. KING

Abstract

This paper examines how the prospect of imminent exit by a competitor in a declining industry affects the market behaviour of that industry prior to exit. We show that ‘survivor’ firms have an incentive to increase their holdings of inventories and to hold excess capacity before exit occurs. Preparation for the failure of a rival will also involve increasing output. This will push down the market price and may hasten the rival firm's demise. The welfare consequences of these actions are mixed but can be very different from the same actins in a growing or stable industry. In particular, holding excess capacity or increased inventories may be procompetitive.

Suggested Citation

  • Stephen P. King, 1998. "The Behaviour of Declining Industries," The Economic Record, The Economic Society of Australia, vol. 74(226), pages 217-230, September.
    • Handle: RePEc:bla:ecorec:v:74:y:1998:i:226:p:217-230
    DOI: 10.1111/j.1475-4932.1998.tb01920.x
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    References listed on IDEAS

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    1. Martha A. Schary, 1991. "The Probability of Exit," RAND Journal of Economics, The RAND Corporation, vol. 22(3), pages 339-353, Autumn.
    2. repec:bla:econom:v:55:y:1988:i:220:p:493-503 is not listed on IDEAS
    3. Dixit, Avinash, 1980. "The Role of Investment in Entry-Deterrence," Economic Journal, Royal Economic Society, vol. 90(357), pages 95-106, March.
    4. Fudenberg, Drew & Tirole, Jean, 1986. "A Theory of Exit in Duopoly," Econometrica, Econometric Society, vol. 54(4), pages 943-960, July.
    5. Fine, Charles H. & Li, Lode, 1989. "Equilibrium exit in stochastically declining industries," Games and Economic Behavior, Elsevier, vol. 1(1), pages 40-59, March.
    6. Michael D. Whinston, 1988. "Exit with Multiplant Firms," RAND Journal of Economics, The RAND Corporation, vol. 19(4), pages 568-588, Winter.
    7. Timothy Dunne & Mark J. Roberts & Larry Samuelson, 1988. "Patterns of Firm Entry and Exit in U.S. Manufacturing Industries," RAND Journal of Economics, The RAND Corporation, vol. 19(4), pages 495-515, Winter.
    8. Deily, Mary E, 1988. "Investment Activity and the Exit Decision," The Review of Economics and Statistics, MIT Press, vol. 70(4), pages 595-602, November.
    9. Franklin, Peter J, 1974. "Some Observations on Exit from the Motor Insurance Industry, 1966-1972," Journal of Industrial Economics, Wiley Blackwell, vol. 22(4), pages 299-313, June.
    10. Pankaj Ghemawat & Barry Nalebuff, 1990. "The Devolution of Declining Industries," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 105(1), pages 167-186.
    11. R. Schmalensee & R. Willig (ed.), 1989. "Handbook of Industrial Organization," Handbook of Industrial Organization, Elsevier, edition 1, volume 1, number 1.
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    Cited by:

    1. Sheng-Ping Yang, 2018. "Entry and Exit Decisions with Switching Regime Excess Capacity," International Advances in Economic Research, Springer;International Atlantic Economic Society, vol. 24(4), pages 351-369, November.

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