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Exit

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  • Pankaj Ghemawat
  • Barry Nalebuff

Abstract

In a declining industry, shrinking demand creates pressure for capacity to be reduced. Who exits first? There is a unique perfect equilibrium for firms with asymmetric market shares and identical unit costs in which survivability is inversely related to size: the largest firm can profitably "hang on" longer than a large firm. Sufficiently strong scale economies can, by conferring cost advantages on large firms, reverse this outcome. Numerical examples, however, suggest that the required cost advantage for large firms to outlast smaller ones may be surprisingly substantial.

Suggested Citation

  • Pankaj Ghemawat & Barry Nalebuff, 1985. "Exit," RAND Journal of Economics, The RAND Corporation, vol. 16(2), pages 184-194, Summer.
    • Handle: RePEc:rje:randje:v:16:y:1985:i:summer:p:184-194
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    Cited by:

    1. Arthur Zillante, 2005. "Survival in a Declining Industry: The Case of Baseball Cards," Industrial Organization 0505004, University Library of Munich, Germany.
    2. James E. Prieger, 2005. "The Impact of Cost Changes on Industry Dynamics," Working Papers 51, University of California, Davis, Department of Economics.
    3. Fridolfsson, Sven-Olof & Stennek, Johan, 2005. "Hold-up of anti-competitive mergers," International Journal of Industrial Organization, Elsevier, vol. 23(9-10), pages 753-775, December.

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