The behaviour of declining industries

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 e xit. We show that 'survivor' firms have an incentive to increase their hold ings of inventories and to hold excess capacity before exit occurs. Prepara tion for the failure of a rival will also involve increasing output. This w ill 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 f rom the same actions in a growing or stable industry. In particular, holdin g excess capacity or increased inventories may be pro-competitive.