Exit, Reentry Costs, and Product Differentiation

This paper examines whether exit favours maximal or minimal differentiation within an infinite horizon supergame with discounting played by three firms. With more than two firms, the problem of which firm exits the market is similar to a coalition formation one. Solving this coalition formation problem, we obtain that exit favours maximal differentiation when reentry is costless. When reentry is unprofitable, exit favours minimal (maximal) differentiation if firms' production capacity is large (small) as compared to the market size.