An Empirically Tractable Dynamic Oligopoly Model: Application to Store Entry and Exit in Dutch Grocery Retail

I develop a simple dynamic oligopoly model for empirical work. A unique feature of the model is that any Markov-perfect equilibrium that survives some intuitive refinements can be quickly computed from low-dimensional contraction mappings in seconds. After computation, it is easy to check the uniqueness of the refined equilibrium. These results facilitate fast estimation using a full-solution approach and produce reliable counterfactual analysis. Model estimation at its minimum only requires panel data on firm presence, yet it quantifies important market primitives, such as toughness of competition and entry costs. I provide a step-by-step illustration of the estimation approach by applying it to the Dutch retail grocery industry, in which chain stores slowly replace local stores. A counterfactual simulation computing equilibrium under a large number of different primitive values shows that relaxing restrictions on chain-store entry will not only quicken the destruction of local stores, but also hurt chain stores’ profits.