Scandinavian Working Papers in Economics

Working Paper Series,
Research Institute of Industrial Economics

No 1414: Does Firm Exit Increase Prices?

Melinda Suveg ()
Additional contact information
Melinda Suveg: Research Institute of Industrial Economics (IFN), Postal: Research Institute of Industrial Economics, Box 55665, SE-102 15 Stockholm, Sweden

Abstract: This paper examines how changes in product market concentration, specifically firm exit, affect prices. I develop a model where firms have variable markups to show that the remaining firms increase their markups and prices after their competitors’ exit. The model predictions are tested using micro-data on Swedish firms. I use the exposure of firms to a bank, which was severely affected by the financial crisis abroad, as an instrument to identify the causal relationship between firm exit and prices. I find that the remaining firms increase their prices by 0.3 percent when firms with a combined market share of one percent exit.

Keywords: Price setting; Market structure; Financial shocks; Firm exit

JEL-codes: D43; E31; E32; L13; L16; L60

57 pages, November 8, 2021

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