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Very Simple Markov‐Perfect Industry Dynamics: Theory

Author

Listed:
  • Jaap H. Abbring
  • Jeffrey R. Campbell
  • Jan Tilly
  • Nan Yang

Abstract

This paper develops a simple model of firm entry, competition, and exit in oligopolistic markets. It features toughness of competition, sunk entry costs, and market‐level demand and cost shocks, but assumes that firms' expected payoffs are identical when entry and survival decisions are made. We prove that this model has an essentially unique symmetric Markov‐perfect equilibrium, and we provide an algorithm for its computation. Because this algorithm only requires finding the fixed points of a finite sequence of contraction mappings, it is guaranteed to converge quickly.

Suggested Citation

  • Jaap H. Abbring & Jeffrey R. Campbell & Jan Tilly & Nan Yang, 2018. "Very Simple Markov‐Perfect Industry Dynamics: Theory," Econometrica, Econometric Society, vol. 86(2), pages 721-735, March.
    • Handle: RePEc:wly:emetrp:v:86:y:2018:i:2:p:721-735
    DOI: 10.3982/ECTA14060
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    Cited by:

    1. Steffen Eibelshäuser & Victor Klockmann & David Poensgen & Alicia von Schenk, 2023. "The Logarithmic Stochastic Tracing Procedure: A Homotopy Method to Compute Stationary Equilibria of Stochastic Games," INFORMS Journal on Computing, INFORMS, vol. 35(6), pages 1511-1526, November.
    2. Nan Yang, 2018. "An Empirically Tractable Dynamic Oligopoly Model: Application to Store Entry and Exit in Dutch Grocery Retail," Marketing Science, INFORMS, vol. 37(6), pages 1029-1049, November.
    3. Taisuke Otsu & Martin Pesendorfer, 2021. "Equilibrium multiplicity in dynamic games: testing and estimation," STICERD - Econometrics Paper Series 618, Suntory and Toyota International Centres for Economics and Related Disciplines, LSE.
    4. Taisuke Otsu & Martin Pesendorfer, 2023. "Equilibrium multiplicity in dynamic games: Testing and estimation," The Econometrics Journal, Royal Economic Society, vol. 26(1), pages 26-42.
    5. Ma, Qingyin & Stachurski, John & Toda, Alexis Akira, 2022. "Unbounded dynamic programming via the Q-transform," Journal of Mathematical Economics, Elsevier, vol. 100(C).
    6. Natalia Kuosmanen & Timo Kuosmanen, 2024. "Inter-industry and intra-industry switching as sources of productivity growth: structural change of Finland’s ICT industries," Journal of Productivity Analysis, Springer, vol. 61(2), pages 107-120, April.
    7. Abbring, Jaap & Campbell, J.R. & Tilly, J. & Yang, N., 2018. "Very Simple Markov-Perfect Industry Dynamics (revision of 2017-021) : Empirics," Other publications TiSEM 3a12f099-900b-44ac-b692-a, Tilburg University, School of Economics and Management.
    8. Peixuan Li & Chuangyin Dang & P. Jean-Jacques Herings, 2024. "Computing perfect stationary equilibria in stochastic games," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 78(2), pages 347-387, September.

    More about this item

    JEL classification:

    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • 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

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