Sunk Costs, Entry, and Exit in Dynamic Oligopoly

25 Pages Posted: 18 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

Nan Yang

National University of Singapore (NUS) - NUS Business School

Date Written: March 16, 2014

Abstract

This paper develops a dynamic econometric framework for the analysis of entry, exit, and competitive conduct in oligopolistic markets. This framework only requires panel data on the demand and producer counts of geographically dispersed markets over time. It is a dynamic extension of Bresnahan and Reiss's (1990, 1991) framework for the analysis of static competition in a cross-section of markets. Our extension to the infinite-horizon model facilitates the empirical analysis of the dynamic determinants of market structure and competition: sunk entry costs and uncertainty. Moreover, it is needed for the consistent measurement of static market primitives, such as the toughness of competition. Our model's timing and expectation assumptions help to select an essentially unique Markov-perfect equilibrium that can be computed quickly by solving a finite sequence of dynamic programming problems with low-dimensional state spaces. We apply our model to the empirical re-analysis of sunk costs and the toughness of competition in the US market for dental services, using Bresnahan and Reiss's (1993) panel data on the number of dentists across geographical markets in the US.

Keywords: Sunk/fixed costs, Entry and Exit, Markov-perfect equilibrium, Dynamic game estimation, Nested fixed point

JEL Classification: L13

Suggested Citation

Abbring, Jaap H. and Campbell, Jeffrey R. and Yang, Nan, Sunk Costs, Entry, and Exit in Dynamic Oligopoly (March 16, 2014). Available at SSRN: https://ssrn.com/abstract=2631551 or http://dx.doi.org/10.2139/ssrn.2631551

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

Nan Yang (Contact Author)

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

1 Business Link
Singapore, 117592
Singapore

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
66
Abstract Views
439
rank
411,119
PlumX Metrics