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A Theory of Exit in Duopoly

Drew Fudenberg
Jean Tirole

Abstract

We develop a duopoly model in which exit occurs because of the existence of fixed costs or opportunity costs. Each firm enters the market knowing its own cost, but not that of its opponent. As times goes on, each firm becomes increasingly pessimistic about the cost of its remaining rival. The time of exit is the only strategic variable, so that our model is a "war of attrition." In contrast to the classic war of attrition, however, we assume that with positive probability each firm's costs may be low enough that staying in forever is a dominant strategy. Thus our model, unlike the classic one, has a unique equilibrium.