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Very Simple Markov-Perfect Industry Dynamics : Theory

Author

Listed:
  • Abbring, Jaap

    (Tilburg University, Center For Economic Research)

  • Campbell, J.R.
  • Tilly, J.
  • Yang, N.

    (Tilburg University, Center For Economic Research)

Abstract

This paper develops a simple model of firm entry, competition, and exit in oligopolistic markets. It features toughness of competition, sunk entry costs, and market‐level demand and cost shocks, but assumes that firms' expected payoffs are identical when entry and survival decisions are made. We prove that this model has an essentially unique symmetric Markov‐perfect equilibrium, and we provide an algorithm for its computation. Because this algorithm only requires finding the fixed points of a finite sequence of contraction mappings, it is guaranteed to converge quickly.
(This abstract was borrowed from another version of this item.)

Suggested Citation

  • Abbring, Jaap & Campbell, J.R. & Tilly, J. & Yang, N., 2017. "Very Simple Markov-Perfect Industry Dynamics : Theory," Discussion Paper 2017-020, Tilburg University, Center for Economic Research.
  • Handle: RePEc:tiu:tiucen:742a0d4c-3766-45de-af30-4ea80793b976
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    File URL: https://pure.uvt.nl/ws/portalfiles/portal/16003745/2017_020.pdf
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    References listed on IDEAS

    as
    1. Fedor Iskhakov & John Rust & Bertel Schjerning, 2016. "Recursive Lexicographical Search: Finding All Markov Perfect Equilibria of Finite State Directional Dynamic Games," Review of Economic Studies, Oxford University Press, vol. 83(2), pages 658-703.
    2. Drew Fudenberg & Jean Tirole, 1991. "Game Theory," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262061414, February.
    3. Preston R. Fee & Hugo M. Mialon & Michael A. Williams, 2004. "What Is a Barrier to Entry?," American Economic Review, American Economic Association, vol. 94(2), pages 461-465, May.
    4. Abbring, Jaap & Campbell, J.R. & Tilly, J. & Yang, N., 2018. "Very Simple Markov-Perfect Industry Dynamics (revision of 2017-021) : Empirics," Other publications TiSEM 3a12f099-900b-44ac-b692-a, Tilburg University, School of Economics and Management.
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    Cited by:

    1. Nan Yang, 2018. "An Empirically Tractable Dynamic Oligopoly Model: Application to Store Entry and Exit in Dutch Grocery Retail," Marketing Science, INFORMS, vol. 37(6), pages 1029-1049, November.

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    More about this item

    Keywords

    demand uncertainty; dynamic oligopoly; firm entry and exit; sunk costs; toughness of competition;
    All these keywords.

    JEL classification:

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

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