Can Firms Benefit From Competition?

Abstract

Abstract We typically assume that exit of competitors from an industry benefits those that remain. We show here that, when one accounts for the supply chain effects of exit, this need not be the case. Specifically, when exit downstream induces exit of upstream producers, input prices rise to the detriment of downstream firms. If mark-ups on inputs are large while downstream mark-ups are small, then exit of downstream competitors reduces the profits of non-exiting firms. We show that this result is quite general and argue that it has application beyond competition policy, being especially apt in the area of industry dynamics.