6533b7d1fe1ef96bd125ca74

RESEARCH PRODUCT

Exit with vertical product differentiation

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Abstract This paper presents a duopoly model of exit from a declining industry with vertical product differentiation. It extends previous IO models on exit that have so far ignored demand effects. The model shows how the interplay between demand and technological factors determine the order of exit. Therefore, demand factors are relevant and should be taken into account. Thus, the firm with a longer tenure as a profitable monopolist does not necessarily outlast its rival. In addition, this paper argues that the low-quality firm may find it optimal to stay in the market despite making temporary losses to outlast its rival.