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Computational Issues in the Analysis of Simple IO Models: A Report from the Applied Front

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  • Ariel Pakes

    ()
    (Department of Economics, Yale University)

Abstract

There has been progress in estimating the demand and cost primitives underlying the static profit and consumer surplus functions derived from simple IO models. This delivers profits and consumer surplus as a function of the distribution of the state variables of the agents active in the market, and has lead to an increase in our ability to do short run analysis of the impact of policy or environmental changes. However the analysis of even intermediate run responses requires some analysis of how the state variables themselves respond to environmental changes. Realistic dynamic models for analyzing the response of state variables are far too complicated for us to solve analytically. On the other hand our ability to generate parameter estimates, together with some assumptions on the nature of equilibrium, should, at least modulus computational problems, allow us to do numerical analysis of these models. This talk will consider the problems and prospects we have encountered in computing Markov Perfect models (Maskin and Tirole,n1988) of industry dynamics, with an eye to generating an ability to compute models that are rich enough to be of use in applied problems. We begin by introducing the skeleton of a model that might be of use in applied work, and then consider the problems associated with computing its equilibrium.

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Paper provided by Society for Computational Economics in its series Computing in Economics and Finance 1996 with number _043.

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Handle: RePEc:sce:scecf6:_043

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  1. Maskin, Eric & Tirole, Jean, 1988. "A Theory of Dynamic Oligopoly, II: Price Competition, Kinked Demand Curves, and Edgeworth Cycles," Econometrica, Econometric Society, vol. 56(3), pages 571-99, May.
  2. John B. Taylor & Harald Uhlig, 1990. "Solving Nonlinear Stochastic Growth Models: A Comparison of Alternative Solution Methods," NBER Working Papers 3117, National Bureau of Economic Research, Inc.
  3. Ariel Pakes & Paul McGuire, 1992. "Computing Markov Perfect Nash Equilibria: Numerical Implications of a Dynamic Differentiated Product Model," NBER Technical Working Papers 0119, National Bureau of Economic Research, Inc.
  4. Bizer, David S & Judd, Kenneth L, 1989. "Taxation and Uncertainty," American Economic Review, American Economic Association, vol. 79(2), pages 331-36, May.
  5. 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.
  6. Pakes, Ariel S, 1986. "Patents as Options: Some Estimates of the Value of Holding European Patent Stocks," Econometrica, Econometric Society, vol. 54(4), pages 755-84, July.
  7. Maskin, Eric & Tirole, Jean, 1988. "A Theory of Dynamic Oligopoly, I: Overview and Quantity Competition with Large Fixed Costs," Econometrica, Econometric Society, vol. 56(3), pages 549-69, May.
  8. Hopenhayn, Hugo & Rogerson, Richard, 1993. "Job Turnover and Policy Evaluation: A General Equilibrium Analysis," Journal of Political Economy, University of Chicago Press, vol. 101(5), pages 915-38, October.
  9. Berry, Steven & Levinsohn, James & Pakes, Ariel, 1995. "Automobile Prices in Market Equilibrium," Econometrica, Econometric Society, vol. 63(4), pages 841-90, July.
  10. Ericson, Richard & Pakes, Ariel, 1995. "Markov-Perfect Industry Dynamics: A Framework for Empirical Work," Review of Economic Studies, Wiley Blackwell, vol. 62(1), pages 53-82, January.
  11. Rust, John, 1987. "Optimal Replacement of GMC Bus Engines: An Empirical Model of Harold Zurcher," Econometrica, Econometric Society, vol. 55(5), pages 999-1033, September.
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