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Very Simple Markov-Perfect Industry Dynamics

Author

Listed:
  • Abbring, Jaap
  • Campbell, Jeffrey
  • Yang, Nan
  • Tilly, Jan

Abstract

This paper develops an econometric model of oligopoly dynamics that can be estimated very quickly from market-level observations of demand shifters and the number of producers. We show that the model has an essentially unique symmetric Markov-perfect equilibrium and provide an algorithm that calculates it quickly. We embed this algorithm in a nested fixed point estimation procedure and apply the result to U.S. local cinema markets. Estimates from County Business Patterns data point to very tough competition for film exhibition rights. Sunk costs make the industry's transition following a permanent demand shock last 10 to 15 years.

Suggested Citation

  • Abbring, Jaap & Campbell, Jeffrey & Yang, Nan & Tilly, Jan, 2016. "Very Simple Markov-Perfect Industry Dynamics," CEPR Discussion Papers 11069, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:11069
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    File URL: https://cepr.org/publications/DP11069
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    Cited by:

    1. Liang, Qiao & Hendrikse, George, 2016. "Pooling and the yardstick effect of cooperatives," Agricultural Systems, Elsevier, vol. 143(C), pages 97-105.

    More about this item

    Keywords

    Demand uncertainty; Dynamic oligopoly; Firm entry and exit; Nested fixed point estimator; Sunk costs; Toughness of competition; Counterfactual policy analysis;
    All these keywords.

    JEL classification:

    • C25 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Discrete Regression and Qualitative Choice Models; Discrete Regressors; Proportions; Probabilities
    • C73 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Stochastic and Dynamic Games; Evolutionary Games
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets

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