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Exit Dilemma: The Role of Private Learning on Firm Survival

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  • Doruk Cetemen
  • Chiara Margaria

Abstract

We study the exit of duopolists from a stochastically declining market. Firms privately learn about the market conditions from observing the stochastic arrival of customers, while exit decisions are publicly observed. A larger firm is more likely to have customers and hence has better information about the market conditions. We provide sufficient conditions for either the smaller or the larger firm to be the first to exit in the unique equilibrium. Because of observational learning, exiting may be a firm's dominant action since continuing operation would bring too optimistic news to the rival, leading it to further postpone its exit.

Suggested Citation

  • Doruk Cetemen & Chiara Margaria, 2024. "Exit Dilemma: The Role of Private Learning on Firm Survival," American Economic Journal: Microeconomics, American Economic Association, vol. 16(1), pages 110-154, February.
    • Handle: RePEc:aea:aejmic:v:16:y:2024:i:1:p:110-54
    DOI: 10.1257/mic.20220037
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    More about this item

    JEL classification:

    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • L21 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Business Objectives of the Firm
    • L25 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Performance

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