Very Simple Markov-Perfect Industry Dynamics: Empirics
63 Pages Posted: 10 Dec 2018 Last revised: 29 Apr 2020
Date Written: 2018-07-24
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, Markov process
JEL Classification: C25, C73, L13
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