Exit Dilemma: The Role of Private Learning on Firm Survival

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. (JEL D21, D43, D83, L21, L25)