Very Simple Markov-Perfect Industry Dynamics
This paper develops an econometric model of firm entry, competition, and exit in dynamic oligopolistic markets. The model entertains market-level demand and cost shocks, sunk entry costs, and parameters that capture economic barriers to entry and the toughness of price competition. Nevertheless its analysis is very simple, because it takes firms to be homogenous. We show that the model has an essentially unique symmetric Markov-perfect equilibrium that can be computed quickly by solving a finite- sequence of low-dimensional contraction mappings. We develop a nested fixed-point procedure for the model's maximum-likelihood estimation from market-level panel data and compare the procedure's performance to that of a mathematical programming with equilibrium constraints approach. The framework is rich enough for a range of applications, such as the welfare analysis of licensing requirements, start-up subsidies, and environmental laws. Moreover, its analysis provides a starting point for the solution of more general models.
|Date of creation:||2013|
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