Foundations of Markov-Perfect Industry Dynamics. Existence, Purification, and Multiplicity
In this paper we show that existence of a Markov perfect equilibrium (MPE) in the Ericson & Pakes (1995) model of dynamic competition in an oligopolistic industry with investment, entry, and exit requires admissibility of mixed entry/exit strategies, con- trary to Ericson & Pakes's (1995) assertion. This is problematic because the existing algorithms cannot cope with mixed strategies. To establish a firm basis for computing dynamic industry equilibria, we introduce ¯rm heterogeneity in the form of randomly drawn, privately known scrap values and setup costs into the model. We show that the resulting game of incomplete information always has a MPE in cuto® entry/exit strate- gies and is computationally no more demanding than the original game of complete information. Building on our basic existence result, we first show that a symmetric and anonymous MPE exists under appropriate assumptions on the model's primitives. Sec- ond, we show that, as the distribution of the random scrap values/setup costs becomes degenerate, MPEs in cuto® entry/exit strategies converge to MPEs in mixed entry/exit strategies of the game of complete information. Next, we provide a condition on the model's primitives that ensures the existence of a MPE in pure investment strategies. Finally, we provide the first example of multiple symmetric and anonymous MPEs in this literature.
|Date of creation:||Nov 2003|
|Contact details of provider:|| Postal: Center for Mathematical Studies in Economics and Management Science, Northwestern University, 580 Jacobs Center, 2001 Sheridan Road, Evanston, IL 60208-2014|
Web page: http://www.kellogg.northwestern.edu/research/math/
More information through EDIRC
|Order Information:|| Email: |
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- David Besanko & Ulrich Doraszelski, 2002.
"Capacity Dynamics and Endogenous Asymmetries in Firm Size,"
Computing in Economics and Finance 2002
196, Society for Computational Economics.
- David Besanko & Ulrich Doraszelski, 2004. "Capacity Dynamics and Endogenous Asymmetries in Firm Size," RAND Journal of Economics, The RAND Corporation, vol. 35(1), pages 23-49, Spring.
- Doraszelski, Ulrich & Pakes, Ariel, 2007.
"A Framework for Applied Dynamic Analysis in IO,"
Handbook of Industrial Organization,
- Bergin, J & Bernhardt, D, 1995. "Anonymous Sequential Games: Existence and Characterization of Equilibria," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 5(3), pages 461-489, May.
- Pakes, Ariel & McGuire, Paul, 2001. "Stochastic Algorithms, Symmetric Markov Perfect Equilibrium, and the 'Curse' of Dimensionality," Econometrica, Econometric Society, vol. 69(5), pages 1261-1281, September.
- Patricia Langohr, 2003. "Competitive Convergence and Divergence: Capability and Position Dynamics," Computing in Economics and Finance 2003 229, Society for Computational Economics.
- Rust, J., 1991. "Estimation of dynamic Structural Models: Problems and Prospects Part I : Discrete Decision Processes," Working papers 9106, Wisconsin Madison - Social Systems.
- Mertens, J.-F. & Neyman, A., "undated".
CORE Discussion Papers RP
454, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
- Mertens, Jean-Francois, 2002. "Stochastic games," Handbook of Game Theory with Economic Applications, in: R.J. Aumann & S. Hart (ed.), Handbook of Game Theory with Economic Applications, edition 1, volume 3, chapter 47, pages 1809-1832 Elsevier.
- Chakrabarti, Subir K., 2003. "Pure strategy Markov equilibrium in stochastic games with a continuum of players," Journal of Mathematical Economics, Elsevier, vol. 39(7), pages 693-724, September.
- Luis M.B. Cabral & Michael Riordan, 1992.
"The Learning Curve, Market Dominance and Predatory Pricing,"
0039, Boston University - Industry Studies Programme.
- Cabral, Luis M B & Riordan, Michael H, 1994. "The Learning Curve, Market Dominance, and Predatory Pricing," Econometrica, Econometric Society, vol. 62(5), pages 1115-1140, September.
- Cabral, L. & Riordan, M., 1992. "The Learning Curve, Market Dominance and Predatory Pricing," Papers 39, Boston University - Industry Studies Programme.
- Hans Haller & Roger Lagunoff, 2000.
"Genericity and Markovian Behavior in Stochastic Games,"
Econometric Society, vol. 68(5), pages 1231-1248, September.
- Hans Haller & Roger Lagunoff, 1999. "Genericity and Markovian Behavior in Stochastic Games," Game Theory and Information 9901003, EconWPA, revised 03 Jun 1999.
- Gowrisankaran, Gautam, 1999. "Efficient representation of state spaces for some dynamic models," Journal of Economic Dynamics and Control, Elsevier, vol. 23(8), pages 1077-1098, August.
- Curtat, Laurent O., 1996. "Markov Equilibria of Stochastic Games with Complementarities," Games and Economic Behavior, Elsevier, vol. 17(2), pages 177-199, December.
- McKelvey, Richard D. & McLennan, Andrew, 1996. "Computation of equilibria in finite games," Handbook of Computational Economics, in: H. M. Amman & D. A. Kendrick & J. Rust (ed.), Handbook of Computational Economics, edition 1, volume 1, chapter 2, pages 87-142 Elsevier.
- Hans M. Amman & David A. Kendrick, . "Computational Economics," Online economics textbooks, SUNY-Oswego, Department of Economics, number comp1.
When requesting a correction, please mention this item's handle: RePEc:nwu:cmsems:1383. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Fran Walker)
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.