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Very Simple Markov-Perfect Industry Dynamics

Author

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

Abstract

This paper develops an econometric model of industry dynamics for concentrated markets that can be estimated very quickly from market-level panel data on the number of producers and consumers using a nested fixed-point algorithm. We show that the model has an essentially unique symmetric Markov-perfect equilibrium that can be calculated from the fixed points of a finite sequence of low-dimensional contraction mappings. Our nested fixed point procedure extends Rust's (1987) to account for the observable implications of mixed strategies on survival. We illustrate the model's empirical application with ten years of County Business Patterns data from the Motion Picture Theaters industry in 573 Micropolitan Statistical Areas. The results are suggestive of fierce competition between theaters in the market for film exhibition rights.

Suggested Citation

  • Jaap H. Abbring & Jeffrey R. Campbell & Jan Tilly & Nan Yang, 2013. "Very Simple Markov-Perfect Industry Dynamics," Working Paper Series WP-2013-20, Federal Reserve Bank of Chicago.
    • Handle: RePEc:fip:fedhwp:wp-2013-20
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    Cited by:

    1. Liang, Qiao & Hendrikse, George, 2016. "Pooling and the yardstick effect of cooperatives," Agricultural Systems, Elsevier, vol. 143(C), pages 97-105.

    More about this item

    Keywords

    demand uncertainty; dynamic oligopoly; firm entry and exit; Markov-perfect equilibrium; nested fixed point estimator; sunk costs; toughness of competition;
    All these keywords.

    JEL classification:

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

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