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Estimating Dynamic Models of Imperfect Competition

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  • Patrick Bajari
  • C. Lanier Benkard
  • Jonathan Levin

Abstract

We describe a two-step algorithm for estimating dynamic games under the assumption that behavior is consistent with Markov perfect equilibrium. In the first step, the policy functions and the law of motion for the state variables are estimated. In the second step, the remaining structural parameters are estimated using the optimality conditions for equilibrium. The second step estimator is a simple simulated minimum distance estimator. The algorithm applies to a broad class of models, including industry competition models with both discrete and continuous controls such as the Ericson and Pakes (1995) model. We test the algorithm on a class of dynamic discrete choice models with normally distributed errors and a class of dynamic oligopoly models similar to that of Pakes and McGuire (1994). Copyright The Econometric Society 2007.

Suggested Citation

  • Patrick Bajari & C. Lanier Benkard & Jonathan Levin, 2007. "Estimating Dynamic Models of Imperfect Competition," Econometrica, Econometric Society, vol. 75(5), pages 1331-1370, September.
    • Handle: RePEc:ecm:emetrp:v:75:y:2007:i:5:p:1331-1370
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    File URL: http://hdl.handle.net/10.1111/j.1468-0262.2007.00796.x
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    JEL classification:

    • L0 - Industrial Organization - - General
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection

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