Exit Dilemma

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