Essays on exit

Julie Hunsaker, Purdue University

Abstract

Essay 1 examines the exit decisions of firms in declining industries. Previous literature has focused on differences in capacity size to determine the order of exit. They assume Cournot competition between equally efficient firms. Firms are assumed to be capacity constrained. Results indicate that the large firm is first to either reduce capacity or exit from the market. This paper extends the paper where exit is an all-or-nothing decision by allowing the firms to produce with excess capacity under both Bertrand-Edgeworth price competition and Cournot competition. A more detailed cost structure is examined. Two striking results emerge. When the cost parameters are relatively "large", it is possible for the small capacity firm to exit the market first under both forms of competition. This result indicates that earlier results are not robust to different cost structures. For an "intermediate" range of cost parameter values, the possibility exists for the small firm to exist the market first under price competition, while the large firm leaves the market first under Cournot competition. This shows earlier results are not invariant to the nature of competition. Only when the cost parameters are "small" do the results under price and quantity competition match the original results. Essay two focuses on the strategic bankruptcy effect of debt and provides conditions under which debt facilitates tacit collusion. It is one of the few papers which differentiates between Chapter 7 and Chapter 11 bankruptcy codes. We show that the form of exit does matter. In an infinite horizon price setting model in which firms have heterogeneous costs, our results indicate that high debt allows collusion to be enforced for discount rates at which collusion breaks down in the absence of debt. This is only true for a bankruptcy code with properties like those of Chapter 11. We are also able to show that high debt and Chapter 11 bankruptcy treatment leads to more collusive outcomes in a finite horizon quantity setting model.

Degree

Ph.D.

Advisors

Kovenock, Purdue University.

Subject Area

Economic theory

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