The theory of dynamic limit pricing implies that a firm maximizes its wealth by gradually sacrificing its dominant market share. We extend the theory by simulation methods to show that higher structural entry barriers generally result in both higher profits and a slower sacrifice of market share. The model is applied to 42 once-dominant firms in U. S. manufacturing to explain jointly the declines of their market shares and the profit rates earned during 1905–1929. The statistical results agree substantially with the hypothesis that these firms behaved consistently with maximizing their wealth through dynamic limit pricing.

In declining industries capacity must be reduced in order to restore profitability. Who bears this burden? Where production is all or nothing, there is a unique subgame-perfect equilibrium: the largest firms exit first [Ghemawat and Nalebuff, 1985]. In this paper firms continuously adjust capacity. Again, there is a unique subgame-perfect equilibrium. All else equal, large firms reduce capacity first, and continue to do so until they shrink to the size of their formerly smaller rivals. Intuitively, bigger firms have lower marginal revenue and correspondingly greater incentives to reduce capacity. This prediction is supported by empirical findings.