Book contents
4 - Declining markets
The devolution of declining industries
Published online by Cambridge University Press: 21 September 2009
Summary
Introduction
Models of dynamic competition generally take a rosy view of time: markets expand; better technologies become available; information improves. In this preoccupation with time as an engine of progress, environments in which time is an agent of regress have been shunted aside. Yet, declining industries form an important part of developed economies: more than 10 per cent of the United States' 1977 manufacturing output was accounted for by industries whose real output had shrunk over the 1967–77 period.
In declining industries the important competitive moves pertain to disinvestment rather than investment. An industry facing decline must reduce its capacity in order to remain profitable. Capacity reduction, however, is a public good that must be provided privately. Each firm would like its competitors to shoulder the reduction: a firm may even maintain excess capacity – and sustain losses – in order to force competitors to withdraw sooner. The question arises: Who gives in first?
The timing game in a declining industry is therefore a war of attrition rather than a race to pre-empt. In the original model of the war of attrition (Maynard Smith, 1974), each competitor chooses between continuing to ‘fight’ at a pre-specified level of intensity or conceding; the competitor that hangs in the longest wins the prize.
- Type
- Chapter
- Information
- Applied Industrial Economics , pp. 81 - 97Publisher: Cambridge University PressPrint publication year: 1998