Exit in Duopoly with Asymmetric Market Shares Under Jump-Diffusion Uncertainty
28 Pages Posted: 24 Feb 2006
Date Written: February 15, 2006
Abstract
This paper examines a declining duopoly, where firms must choose when to exit from the market. The exogenous shock in the industry follows an exponential jump-diffusion process. We find Markov-perfect equilibria in firms' exit strategies. With small asymmetry in the firm-specific parameters, there is always a unique equilibrium. However, with an increase in asymmetry, another equilibrium with the reversed order of exit may appear, ruining the uniqueness.For situations with unique equilibrium, we show that the order of exit is determined by the scrap values of the two firms, not the size of the firms.
Keywords: duopoly, real options, jump-diffusion processes, Levy processes
JEL Classification: L10, L13, C63, C65
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