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

Suggested Citation

Boyarchenko, Nina, Exit in Duopoly with Asymmetric Market Shares Under Jump-Diffusion Uncertainty (February 15, 2006). Available at SSRN: https://ssrn.com/abstract=884438 or http://dx.doi.org/10.2139/ssrn.884438

Nina Boyarchenko (Contact Author)

Federal Reserve Bank of New York ( email )

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