Exit in Duopoly under Uncertainty

Abstract

This paper examines a declining duopoly, where the firms must choose when to exit from the market. The uncertainty is modeled by letting the revenue stream follow a geometric Brownian motion. We consider the Markovperfect equilibrium in firms' exit strategies. With a low degree of uncertainty there is a unique equilibrium, where one of the firms always exits before the other. However, when uncertainty is increased, another equilibrium with the reversed order of exit may appear ruining the uniqueness. Whether this happens or not depends on the degree of asymmetry in the firm specific parameters.

Developing Real Option Game Models

“…With the exceptions of Lambrecht (2001), Murto (2004), Ruiz-Aliseda (2013) and Goto et al (2008), ROG models study entry and exit strategies in isolation, that is firms' entry/exit behavior does not consider the interaction between the two options. Lambrecht (2001) investigates the interaction between market entry, company foreclosure and capital structure in a duopoly, where firms are restricted to a single entry/exit trigger strategy (one-shot entry/exit game), and provides explicit entry and exit thresholds.…”

Strategic Investment Under Uncertainty: Merging Real Options with Game Theory

“…In case (16) holds the usual preemption game results. The analysis of this game is qualitatively similar to what we have seen in Section 2.…”

Non-Exclusive Real Options and the Principle of Rent-Equalisation

“…Therefore, much of the analysis in Fudenberg and Tirole (1985) is not directly applicable to these models. A first step towards a formal analysis of game theoretic real option models is provided by Murto (2004), who considers exit in a duopoly with declining profitability. In that paper, however, the coordination problem does not arise and an equilibrium in pure strategies can be found.…”

“…In that paper, however, the coordination problem does not arise and an equilibrium in pure strategies can be found. Murto (2004) uses the strategy concept introduced in Dutta and Rustichini (1995). In this framework, the profitability of each firm depends (deterministically) on how many firms are present in the industry and a random part, which follows a geometric Brownian motion (GBM).…”

“…In this paper, the Dutta and Rustichini (1995) and Murto (2004) framework is extended in several ways. Firstly, I adapt the method of Fudenberg and Tirole (1985) to solve the coordination problem that often arises in preemption games.…”