Very Simple Markov-Perfect Industry Dynamics

57 Pages Posted: 14 Dec 2013

See all articles by Jaap H. Abbring

Jaap H. Abbring

Tilburg University - Department of Econometrics & Operations Research; Tilburg University - Center for Economic Research (CentER); Tinbergen Institute; IZA Institute of Labor Economics

Jeffrey R. Campbell

University of Notre Dame; Tilburg University

Jan Tilly

University of Pennsylvania - Department of Economics

Nan Yang

University of Amsterdam and Tinbergen Institute

Multiple version iconThere are 4 versions of this paper

Date Written: November 30, 2013

Abstract

This paper develops an econometric model of industry dynamics for concentrated markets that can be estimated very quickly from market-level panel data on the number of producers and consumers using a nested fixed-point algorithm. We show that the model has an essentially unique symmetric Markov-perfect equilibrium that can be calculated from the fixed points of a finite sequence of low-dimensional contraction mappings. Our nested fixed point procedure extends Rust's (1987) to account for the observable implications of mixed strategies on survival. We illustrate the model's empirical application with ten years of County Business Patterns data from the Motion Picture Theaters industry in 573 Micropolitan Statistical Areas. The results are suggestive of fierce competition between theaters in the market for film exhibition rights.

Keywords: demand uncertainty, dynamic oligopoly, firm entry and exit, sunk costs

JEL Classification: L13, C25, C73

Suggested Citation

Abbring, Jaap H. and Campbell, Jeffrey R. and Tilly, Jan and Yang, Nan, Very Simple Markov-Perfect Industry Dynamics (November 30, 2013). FRB of Chicago Working Paper No. 2013-20, Available at SSRN: https://ssrn.com/abstract=2366916 or http://dx.doi.org/10.2139/ssrn.2366916

Jaap H. Abbring

Tilburg University - Department of Econometrics & Operations Research ( email )

Tilburg, 5000 LE
Netherlands

HOME PAGE: http://center.uvt.nl/staff/abbring/

Tilburg University - Center for Economic Research (CentER) ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands

HOME PAGE: http://center.uvt.nl/staff/abbring/

Tinbergen Institute

Roetersstraat 31
Amsterdam, 1018WB
Netherlands

HOME PAGE: http://www.tinbergen.nl

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

Jeffrey R. Campbell (Contact Author)

University of Notre Dame ( email )

United States

Tilburg University ( email )

Tilburg, 5000 LE
Netherlands

Jan Tilly

University of Pennsylvania - Department of Economics ( email )

Ronald O. Perelman Center for Political Science
133 South 36th Street
Philadelphia, PA 19104-6297
United States

Nan Yang

University of Amsterdam and Tinbergen Institute ( email )

Spui 21
Amsterdam, 1018 WB
Netherlands

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