DP11069 Very Simple Markov-Perfect Industry Dynamics

Author(s): Jaap H Abbring, Jeffrey R Campbell, Jan Tilly, Nan Yang
Publication Date: January 2016
Keyword(s): counterfactual policy analysis, demand uncertainty, dynamic oligopoly, firm entry and exit, nested fixed point estimator, sunk costs, toughness of competition
JEL(s): C25, C73, L13
Programme Areas: Industrial Organization
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=11069

This paper develops an econometric model of oligopoly dynamics that can be estimated very quickly from market-level observations of demand shifters and the number of producers. We show that the model has an essentially unique symmetric Markov-perfect equilibrium and provide an algorithm that calculates it quickly. We embed this algorithm in a nested fixed point estimation procedure and apply the result to U.S. local cinema markets. Estimates from County Business Patterns data point to very tough competition for film exhibition rights. Sunk costs make the industry's transition following a permanent demand shock last 10 to 15 years.