Production Capacity and Patterns of Exit in Declining Industries

Abstract

This paper investigates how production capacities of firms affect the firm behavior in declining industries. An exit model in which firms do not have to operate at full capacity is presented. The result shows that it is the size of firms' operating costs relative to their opportunity costs of capital that determines the patterns of exit in declining industries. It is an interesting result since a larger firm. contrary to the existing literature, can survive longer than a smaller firm when the operating costs dominate the opportunity costs of capital.