Exit Dilemma

50 Pages Posted: 23 Nov 2020 Last revised: 22 Feb 2021

See all articles by Doruk Cetemen

Doruk Cetemen

Collegio Carlo Alberto

Chiara Margaria

Boston University

Date Written: November 17, 2020

Abstract

We study exit decisions of duopolists from a stochastically declining market. Over time, firms privately learn about market conditions from observing the stochastic arrival of customers. Exit decisions are publicly observed; thus the model features both observational and private learning. A larger firm is more likely to have customers and hence has better information about market conditions than does a smaller rival. We provide sufficient conditions for either the smaller or the larger firm to be the first to exit the market in the unique equilibrium. Uniqueness follows from iterated conditional dominance: because of observational learning, exiting may be a firm’s dominant action since continuing operation would bring too much of a good news to the rival, leading it to further postpone its exit.

Keywords: Duopoly, Exit, Private Learning, War of Attrition

JEL Classification: C73, D21, D43, D82, D83

Suggested Citation

Cetemen, Doruk and Margaria, Chiara, Exit Dilemma (November 17, 2020). Available at SSRN: https://ssrn.com/abstract=3732674 or http://dx.doi.org/10.2139/ssrn.3732674

Doruk Cetemen (Contact Author)

Collegio Carlo Alberto

Piazza Arbarello 8, Torino
Torino, Torino 10122
Italy
+39 011 670 5000 (Phone)
+39 011 670 5082 (Fax)

HOME PAGE: http://https://www.carloalberto.org/

Chiara Margaria

Boston University ( email )

270 Bay State Rd
Boston, MA 02215
United States

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