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A Dynamic Quality Ladder Model with Entry and Exit: Exploring the Equilibrium Correspondence Using the Homotopy Method

  • Borkovsky, Ron N.
  • Doraszelski, Ulrich
  • Kryukov, Yaroslav
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    This paper explores the equilibrium correspondence of a dynamic quality ladder model with entry and exit using the homotopy method. The homotopy method facilitates exploring the equilibrium correspondence in a systematic fashion; it is ideally suited for investigating the economic phenomena that arise as one moves through the parameter space and is especially useful in games that have multiple equilibria. We discuss the theory of the homotopy method and its application to dynamic stochastic games. We then present the following results: First, we find that the more costly and/or less beneficial it is to achieve or maintain a given quality level, the more a leader invests in striving to induce the follower to give up; the more quickly the follower does so; and the more asymmetric is the industry structure that arises. Second, we show that the possibility of entry and exit alone gives rise to predatory and limit investment. Third, we illustrate and discuss the multiple equilibria that arise in the quality ladder model, highlighting the presence of entry and exit as a source of multiplicity.

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    Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 7560.

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    Date of creation: Nov 2009
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    Handle: RePEc:cpr:ceprdp:7560
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    1. Kenneth L. Judd, 1998. "Numerical Methods in Economics," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262100711, June.
    2. Christopher A. Laincz & Ana Rodrigues, 2007. "The Impact of Cost-Reducing R&D Spillovers on the Ergodic Distribution of Market Structures," Working Papers 23, Portuguese Competition Authority.
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    4. Ariel Pakes & Michael Ostrovsky & Steve Berry, 2004. "Simple Estimators for the Parameters of Discrete Dynamic Games (with Entry/Exit Samples)," NBER Working Papers 10506, National Bureau of Economic Research, Inc.
    5. Minjae Song, 2006. "A Dynamic Analysis of Cooperative Research in the Semiconductor Industry," 2006 Meeting Papers 468, Society for Economic Dynamics.
    6. Patrick Bajari & Han Hong & Stephen P. Ryan, 2010. "Identification and Estimation of a Discrete Game of Complete Information," Econometrica, Econometric Society, vol. 78(5), pages 1529-1568, 09.
    7. Bajari, Patrick & Benkard, C. Lanier & Levin, Jonathan, 2007. "Estimating Dynamic Models of Imperfect Competition," Research Papers 1852r1, Stanford University, Graduate School of Business.
    8. Ronald L. Goettler & Brett R. Gordon, 2011. "Does AMD Spur Intel to Innovate More?," Journal of Political Economy, University of Chicago Press, vol. 119(6), pages 1141 - 1200.
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