Exiting the Market
Tuesday, September 23, 2008
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We have been discussing in our microeconomics classes, examples of businesses that have exited a particular market - reallocating their resources into what they hope and expect will be more profitable avenues. A business-collapse or implosion is an obvious example of when there is a net loss of firms from a marketplace, for example the collapse of several low-cost airlines this year and the closure of many businesses linked to the ailing housing market.
But often businesses decide to leave a market, even though they might be operating profitably because they are not making a sufficiently high return to justify the risk and capital employed. In the standard theory of the firm, economists use the concept of sub-normal profits to describe a situation where the rate of profit is not enough to keep resources in their present use; there might be greener grass to explore.
We were trying to create a range of examples of where this process has been at work - here are the results of our discussions. can blog readers add more or perhaps take issue with the ones listed?
The exit of dentists from NHS dentistry
NHS midwives leaving for the private sector
Sega moving out of console manufacturing and focusing on being a games developer
The withdrawal of some mortgage lenders from the UK mortgage finance market this spring and summer
Farmers leaving the land because of sub-normal returns (or shifting crop production in response to changing prices and anticipated profits)
Closure of pubs - for a variety of reasons among them the smoking ban and the impact of cheap supermarket alcohol
Toshiba exiting the production of their HD-DVD format
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Comments
Several of the major multinational oil companies are doing this right now. But they are going directly into other businesses. Rather, they are returning the capital to the stockholders through high dividends and stock buybacks that allows the stockholders to reinvest in alternative businesses.
Posted by on 09/23 at 03:23 PM
But are ALL resources truly reallocated? Why are some of our cities/conurbations blighted by derelict infrastructure/capital eg factories? May be we have a short run and long run situation in existence here. Does not market failure to some extent prevent true re-allocation of resources eg. unemployment? Just a thought
Posted by on 09/24 at 02:26 AM
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