A declining market experiences dropping values as part of the normal progression of life stages for financial markets or in reaction to specific financial events. Recovery may be possible in some cases, while in others, a market continues to decline until it is no longer functional. For example, the market for telegraphy equipment in most nations is extremely slim because this technology has been replaced by more modern communication options. This declining market is unlikely to recover in the near future, because consumers no longer have a demand for those products.
Markets go through a series of predictable and easy to track stages over time. New markets ideally grow, starting with low barriers to entry until the market slowly starts to become saturated with producers, which makes it harder for new entrants to gain a foothold. As markets mature, they can start to turn the corner and decline. This can occur for a number of different reasons.
One reason for a declining market is saturation; if everyone already owns a product or uses a service, for example, there’s no room for growth. Companies may combat this by rolling out new products and services to existing customers. For example, subscribers to a utility might be offered expanded services or new options to entice them into increasing their subscriptions. Landline customers with basic service might decide to add caller identification or blocking, for instance.
Replacement and obsolescence can be another issue. As products and services evolve, new generations can develop and consumers turn to these alternatives. Companies must stay one step ahead of their market to be ready for the moment when their products enter a declining market. Economic pressures may shrink a market as well, reducing demand by limiting the number of consumers willing to pay, or by creating instability in other ways.
The housing market is a classic example of a market that goes through growth and decline in a cyclical fashion. Housing markets grow in economic boom years with high demand for housing and members of the public willing to pay a premium. Over time they can enter decline as people lose interest because of bubble collapses, regional changes that make a market less appealing, and other pressures. For instance, a highway might move, taking traffic away from a community and creating a declining market for commercial real estate because businesses don’t want to establish themselves in a shrinking community.