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Very Simple Markov-Perfect Industry Dynamics: Empirics

Author

Listed:
  • Abbring, Jaap H.

    (Tilburg University)

  • Campbell, Jeffrey R.

    (Federal Reserve Bank of Chicago)

  • Tilly, Jan

    () (QuantCo, Inc.)

  • Yang, Nan

    (National Univerrsity of Singapore)

Abstract

This paper develops an econometric model of firm entry, competition, and exit in oligopolistic markets. The model has an essentially unique symmetric Markov-perfect equilibrium, which can be computed very quickly. We show that its primitives are identified from market-level data on the number of active firms and demand shifters, and we implement a nested fixed point procedure for its estimation. Estimates from County Business Patterns data on U.S. local cinema markets point to tough local competition. Sunk costs make the industry's transition following a permanent demand shock last 10 to 15 years.

Suggested Citation

  • Abbring, Jaap H. & Campbell, Jeffrey R. & Tilly, Jan & Yang, Nan, 2018. "Very Simple Markov-Perfect Industry Dynamics: Empirics," Working Paper Series WP-2018-17, Federal Reserve Bank of Chicago.
  • Handle: RePEc:fip:fedhwp:wp-2018-17
    DOI: 10.21033/wp-2018-17
    as

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    References listed on IDEAS

    as
    1. Tauchen, George, 1986. "Finite state markov-chain approximations to univariate and vector autoregressions," Economics Letters, Elsevier, vol. 20(2), pages 177-181.
    2. Fedor Iskhakov & Jinhyuk Lee & John Rust & Bertel Schjerning & Kyoungwon Seo, 2016. "Comment on “Constrained Optimization Approaches to Estimation of Structural Models”," Econometrica, Econometric Society, vol. 84, pages 365-370, January.
    3. 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 549-569, May.
    4. Alon Eizenberg, 2014. "Upstream Innovation and Product Variety in the U.S. Home PC Market," Review of Economic Studies, Oxford University Press, vol. 81(3), pages 1003-1045.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    demand uncertainty; dynamic oligopoly; firm entry and exit; nested fixed point; estimator; sunk costs; toughness of competition; counterfactual policy analysis; Markov process;

    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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