Very Simple Markov-Perfect Industry Dynamics

68 Pages Posted: 17 Jul 2015

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

National University of Singapore (NUS) - NUS Business School

Multiple version iconThere are 4 versions of this paper

Date Written: July 1, 2015

Abstract

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

Suggested Citation

Abbring, Jaap H. and Campbell, Jeffrey R. and Tilly, Jan and Yang, Nan, Very Simple Markov-Perfect Industry Dynamics (July 1, 2015). Available at SSRN: https://ssrn.com/abstract=2631509 or http://dx.doi.org/10.2139/ssrn.2631509

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

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 (Contact Author)

National University of Singapore (NUS) - NUS Business School ( email )

1 Business Link
Singapore, 117592
Singapore

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