Very Simple Markov-Perfect Industry Dynamics
68 Pages Posted: 17 Jul 2015
Date Written: July 1, 2015
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 quickly calculates it. We embed this algorithm in a nested fixed point procedure for the model's estimation and apply it 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.
Keywords: demand uncertainty, dynamic oligopoly, firm entry and exit, nested fixed point estimator, sunk costs, toughness of competition, counterfactual policy analysis.
JEL Classification: L13, C25, C73
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