Very Simple Markov-Perfect Industry Dynamics: Theory

CentER Discussion Paper Series No. 2017-020

21 Pages Posted: 4 Apr 2017

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

Date Written: March 31, 2017

Abstract

This paper develops a simple model of firm entry, competition, and exit in oligopolistic markets. It features toughness of competition, sunk entry costs, and market-level demand and cost shocks, but assumes that firms' expected payoffs are identical when entry and survival decisions are made. We prove that this model has an essentially unique symmetric Markov-perfect equilibrium, and we provide an algorithm for its computation. Because this algorithm only requires finding the fixed points of a finite sequence of contraction mappings, it is guaranteed to converge quickly.

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

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: Theory (March 31, 2017). CentER Discussion Paper Series No. 2017-020, Available at SSRN: https://ssrn.com/abstract=2945407 or http://dx.doi.org/10.2139/ssrn.2945407

Jaap H. Abbring (Contact Author)

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

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

1 Business Link
Singapore, 117592
Singapore

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