Very simple Markov‐Perfect industry dynamics

Theory

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

Research output: Contribution to journal › Article › Scientific › peer-review

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
Pages (from-to)721-735
JournalEconometrica
Volume86
Issue number2
DOIs
Publication statusPublished - 31 Mar 2018

Fingerprint

Industry dynamics
Contraction mapping
Firm entry
Exit
Entry costs
Fixed point
Costs

Keywords

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

Cite this

Abbring, Jaap ; Campbell, Jeffrey ; Tilly, J. ; Yang, N. / Very simple Markov‐Perfect industry dynamics : Theory. In: Econometrica. 2018 ; Vol. 86, No. 2. pp. 721-735.
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Abbring, J, Campbell, J, Tilly, J & Yang, N 2018, 'Very simple Markov‐Perfect industry dynamics: Theory', Econometrica, vol. 86, no. 2, pp. 721-735. https://doi.org/10.3982/ECTA14060

Very simple Markov‐Perfect industry dynamics : Theory. / Abbring, Jaap; Campbell, Jeffrey; Tilly, J.; Yang, N.

In: Econometrica, Vol. 86, No. 2, 31.03.2018, p. 721-735.

Research output: Contribution to journal › Article › Scientific › peer-review

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N2 - 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.

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Abbring J, Campbell J, Tilly J, Yang N. Very simple Markov‐Perfect industry dynamics: Theory. Econometrica. 2018 Mar 31;86(2):721-735. https://doi.org/10.3982/ECTA14060

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