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Working Paper No. 1414

Does Firm Exit Increase Prices?

Working Paper
Reference
Suveg, Melinda (2021). “Does Firm Exit Increase Prices?”. IFN Working Paper No. 1414. Stockholm: Research Institute of Industrial Economics (IFN).

Author
Melinda Suveg

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.