Very Simple Markov-Perfect Industry Dynamics: Empirics

CentER Discussion Paper Series No. 2018-040

63 Pages Posted: 4 Apr 2017 Last revised: 7 Oct 2018

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: October 2, 2018

Abstract

This paper develops an econometric model of firm entry, competition, and exit in oligopolistic markets. The model has an essentially unique symmetric Markov-perfect equilibrium, which can be computed very quickly. We show that its primitives are identified from market-level data on the number of active firms and demand shifters, and we implement a nested fixed point procedure for its estimation. Estimates from County Business Patterns data on U.S. local cinema markets point to tough local competition. 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: Empirics (October 2, 2018). CentER Discussion Paper Series No. 2018-040, Available at SSRN: https://ssrn.com/abstract=2945432 or http://dx.doi.org/10.2139/ssrn.2945432

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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