Very Simple Markov-Perfect Industry Dynamics: Theory

Jaap Abbring, J.R. Campbell, J. Tilly, N. Yang

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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.
Original languageEnglish
Place of PublicationTilburg
PublisherCentER, Center for Economic Research
Number of pages21
Volume2017-020
Publication statusPublished - 31 Mar 2017

Publication series

NameCentER Discussion Paper
Volume2017-020

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Keywords

  • demand uncertainty
  • dynamic oligopoly
  • firm entry and exit
  • sunk costs
  • toughness of competition

Cite this

Abbring, J., Campbell, J. R., Tilly, J., & Yang, N. (2017). Very Simple Markov-Perfect Industry Dynamics: Theory. (CentER Discussion Paper; Vol. 2017-020). Tilburg: CentER, Center for Economic Research.