As a 50+ year model railroader, I would say "collapse" isn't quite the word. "Adjusting" (in some cases severe adjustment) is a better term.
The basic hobby of model railroading is still doing well. Segments of it isn't faring so well (sound like C/L woes?), and the outlook in those segments is a bit gloomy.
Doing well:
* HO scale. Still a very good market for all the more popular persuasions of modeling preferences. Good market for new products, as well as a good buyers market in the secondary market.
* N scale is still doing okay.
Not doing so well:
The 3-rail world -
* "Traditional" type 3-rail trains, of which the huge bulk of Postwar Lionel comprises, is in trouble. Simply put, the "Baby Boomers" that fueled the nostalgia-based market are aging out as well as passing on. The subsequent 3-rail generations do not have near the interest in Postwar, or traditional sized 3-rail trains. As Postwar/Traditional hobbyists die out, their sizable collections are being dumped on the market. Postwar price points are about 50% what they were some 10-15 years ago. Worse, there's no hope of a reversal in sight.
* "Scale" 3-rail is doing fair, but again, the secondary market is saturated with deceased modeler's collections. This poses a problem for the mfg-er's of 3-rail trains. The big players in 3-rail mfg-er's are trying to infiltrate the HO scale market, but that is a significant challenge given their "toy train" mindset.
There will be a model trains hobby into the foreseeable future (albeit smaller), but it will evolve as it always has since its conception well over 100 years ago.
The great thing about model railroading is there is no governmental interference that has negative impact on the way the hobbyist enjoys his hobby, or that will impact the "business" of model trains. (Model trains have yet to be perceived by our fool government as a terrorist threat, nor can they be perceived as interfering with the prototype, as is the case with "flight patterns/no fly zones" in model aviation.)
Hope this helps.
Andre