With regards to the demise of Linens and Things and Circuit City: What does this imply about competition in the realm of economics. In economic models, competition and free entry into a market is assumed to be good in the sense that it drives prices down to its marginal cost. There is a parallel in a duopoly market as well, but what happens in this case after the competitor has been killed off (even though exit was not precipitated by a price war) through perhaps better management?
Does this imply that the market can only sustain one large retailer? If so, should we expect to see a cycle where prices begin to rise at the surviving retailers to the point where there is entry deterrence? Even if the market is contestable, is rising retail prices a sign that the assumption that competition drives prices down to its long run equilibrium where entry equals exits invalid?
While these questions do not imply the demise of the assumption that competition is good for prices it also highlights the possible social cost of firm exits within the competitive model that is not accounted for: job losses, for instance. The theoretical argument is that these workers will be reallocated to another industry where they can be more productive - the evidence is scant that this happens. Research on job retraining programs for laid off and unemployed workers show that workers do not regain their full income. This research however may be biased toward older workers and may not be representative of the workforce in retailing.
The question however, remains: Are lower prices through competition always good in terms of social welfare? Do rising prices after a "cycle" of competition (or increased volatility of prices through exit and entry) invalidate the assumption that competition drives prices to a long run equilibrium? Think of the airline industry and its constant rise and fall for instance.