A note on capacity reduction and the role of firm size in declining industries

Abstract

Declining industries have been explained by game-theoretic approaches with size as the determining factor as to who exits first. Benefits and costs of capacity reduction have been neglected and are discussed here. When a strategically behaving firm initially reduces capacity, it can force small competitors from the market by internalizing the benefits of capacity reduction. The second factor that determines exit refers to transfering capacity to other markets: First to exit are those firms that are good at reducing their exit costs by finding new markets for their assets.