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Computational Methods for Oblivious Equilibrium

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  • Weintraub, Gabriel Y.

    (Columbia U)

  • Benkard, C. Lanier

    (Stanford U)

  • Van Roy, Benjamin
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    Abstract

    Oblivious equilibrium is a new solution concept for approximating Markov perfect equilibrium in dynamic models of imperfect competition among heterogeneous firms and has recently been used in multiple economic studies. In this paper, we present algorithms for computing oblivious equilibrium and for bounding approximation error. We report results from computational case studies that serve to assess both efficiency of the algorithms and accuracy of oblivious equilibrium as an approximation to Markov perfect equilibrium. We also extend the definition of oblivious equilibrium, originally proposed for models with only firm-specific idiosyncratic random shocks, and our algorithms to accommodate models with industry-wide aggregate shocks. Our results suggest that, by using oblivious equilibrium to approximate Markov perfect equilibrium, it is possible to greatly increase the set of dynamic models of imperfect competition that can be analyzed computationally.

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    Bibliographic Info

    Paper provided by Stanford University, Graduate School of Business in its series Research Papers with number 1969.

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    Date of creation: Apr 2007
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    Handle: RePEc:ecl:stabus:1969

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    1. Fershtman, Chaim & Pakes, Ariel, 2009. "Finite State Dynamic Games with Asymmetric Information: A Framework for Applied Work," CEPR Discussion Papers 7323, C.E.P.R. Discussion Papers.
    2. Andrew Caplin & Barry Nalebuff, 1990. "Aggregation and Imperfect Competition: On the Existence of Equilibrium," Cowles Foundation Discussion Papers 937, Cowles Foundation for Research in Economics, Yale University.
    3. Fabiano Schivardi & Martin Schneider, 2008. "Strategic Experimentation and Disruptive Technological Change," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 11(2), pages 386-412, April.
    4. Minjae Song, 2011. "A Dynamic Analysis Of Cooperative Research In The Semiconductor Industry," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 52(4), pages 1157-1177, November.
    5. Allan Collard-Wexler, 2010. "Productivity Dispersion and Plant Selection in the Ready-Mix Concrete Industry," 2010 Meeting Papers 105, Society for Economic Dynamics.
    6. Ronald L. Goettler & Christine A. Parlour, 2004. "Equilibrium in a Dynamic Limit Order Market," 2004 Meeting Papers 757, Society for Economic Dynamics.
    7. Kenneth Judd & Karl Schmedders & Sevin Yeltekin, . "Optimal Rules for Patent Races," GSIA Working Papers 2006-E37, Carnegie Mellon University, Tepper School of Business.
    8. Victor Aguirregabiria & Pedro Mira, 2004. "Sequential Estimation Of Dynamic Discrete Games," Working Papers wp2004_0413, CEMFI.
    9. Patrick Bajari & C. Lanier Benkard & Jonathan Levin, 2007. "Estimating Dynamic Models of Imperfect Competition," Econometrica, Econometric Society, vol. 75(5), pages 1331-1370, 09.
    10. Ariel Pakes & Michael Ostrovsky & Steven Berry, 2007. "Simple estimators for the parameters of discrete dynamic games (with entry/exit examples)," RAND Journal of Economics, RAND Corporation, vol. 38(2), pages 373-399, 06.
    11. Martin Pesendorfer & Philipp Schmidt-Dengler, 2003. "Identification and Estimation of Dynamic Games," NBER Working Papers 9726, National Bureau of Economic Research, Inc.
    12. Berry, Steven & Pakes, Ariel, 1993. "Some Applications and Limitations of Recent Advances in Empirical Industrial Organization: Merger Analysis," American Economic Review, American Economic Association, vol. 83(2), pages 247-52, May.
    13. C. Lanier Benkard, 2004. "A Dynamic Analysis of the Market for Wide-Bodied Commercial Aircraft," Review of Economic Studies, Oxford University Press, vol. 71(3), pages 581-611.
    14. de Roos, Nicolas, 2004. "A model of collusion timing," International Journal of Industrial Organization, Elsevier, vol. 22(3), pages 351-387, March.
    15. Gautam Gowrisankaran & Robert J. Town, 1997. "Dynamic Equilibrium in the Hospital Industry," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 6(1), pages 45-74, 03.
    16. Gabriel Y. Weintraub & C. Lanier Benkard & Benjamin Van Roy, 2005. "Markov perfect industry dynamics with many firms," Working Paper Series 2005-23, Federal Reserve Bank of San Francisco.
    17. Gabriel Weintraub & C. Lanier Benkard & Ben Van Roy, 2005. "Markov Perfect Industry Dynamics with Many Firms," NBER Working Papers 11900, National Bureau of Economic Research, Inc.
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