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
Date Written: October 2, 2018
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: Suggested Citation