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Market exit and minimax regret

Gisèle Umbhauer

Working Papers of BETA from Bureau d'Economie Théorique et Appliquée, UDS, Strasbourg

Abstract: We study an overcrowded duopoly market where the only strategic variable is the exit time. We suppose that the surviving firm gets a positive monopoly profit and we focus on the classic context with complete information and identical firms. The only symmetric Nash equilibrium of this war of attrition is a mixed-strategy equilibrium that leads to a null expected payoff, i.e. the payoff a firm gets when it immediately exits the market. This result is not persuasive, both from an economic and from a strategic viewpoint. We argue that the minimax regret approach, that builds upon two opposite regrets - exiting the market too late and exiting the market too early - is more convincing. The minimax regret behavior, quite different from the mixed- strategy Nash equilibrium behavior, allows both firms to get a positive expected payoff.

Keywords: war of attrition; minimax regret; Nash equilibrium; maximin payoff; mixed strategy; duopoly. (search for similar items in EconPapers)
JEL-codes: C72 D4 (search for similar items in EconPapers)
Date: 2020
New Economics Papers: this item is included in nep-bec and nep-gth
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