Horizontal mergers and exit in declining industries

Previous work on exit in declining industries has neglected mergers. We examine a simple model that predicts which declining industries experience horizontal mergers. Mergers are more likely if 1) market concentration is high; 2) the inverse demand curve is steep at high levels of output and flat at low levels of output; and 3) the industry declines slowly early on and rapidly later on. The conditions that make mergers privately profitable also tend to make them socially optimal. We test the model using U.S. manufacturing industries that declined during 1975-1995 and find some empirical support.