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The Behaviour of Declining Industries

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  • King, Stephen P

Abstract

This paper examines how the prospect of imminent exit by a competitor in a declining industry affects the market behavior of that industry prior to exit. The author shows 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 actions in a growing or stable industry. In particular, holding excess capacity or increased inventories may be procompetitive. Copyright 1998 by The Economic Society of Australia.

Suggested Citation

  • King, Stephen P, 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:217-30
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    Cited by:

    1. Angelo Castaldo & Laura Ferrari-Bravo, 2014. "Mergers in declining industries: puzzles from competition and industrial policies," Public Finance Research Papers 9, Istituto di Economia e Finanza, DSGE, Sapienza University of Rome.
    2. 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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