Abstract

http://ssrn.com/abstract=953750
 
 

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Last-In First-Out Oligopoly Dynamics


Jaap H. Abbring


Tilburg University - Department of Econometrics & Operations Research; Tilburg University - Center for Economic Research (CentER); Tinbergen Institute; Institute for the Study of Labor (IZA)

Jeffrey R. Campbell


Federal Reserve Bank of Chicago

November 2006

FRB of Chicago Working Paper No. 2006-28
Tinbergen Institute Discussion Paper No. 06-110/3

Abstract:     
This paper extends the static analysis of oligopoly structure into an infinite-horizon setting with sunk costs and demand uncertainty. The observation that exit rates decline with firm age motivates the assumption of last-in first-out dynamics: An entrant expects to produce no longer than any incumbent. This selects an essentially unique Markov-perfect equilibrium. With mild restrictions on the demand shocks, a sequence of thresholds describes firms' equilibrium entry and survival decisions. Bresnahan and Reiss's (1993) empirical analysis of oligopolists' entry and exit assumes that such thresholds govern the evolution of the number of competitors. Our analysis provides an infinite-horizon game-theoretic foundation for that structure.

Number of Pages in PDF File: 45

Keywords: Sunk costs, Demand uncertainty, Markov-Perfect equilibrium

JEL Classification: L13

working papers series


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Date posted: December 27, 2006  

Suggested Citation

Abbring, Jaap H. and Campbell, Jeffrey R., Last-In First-Out Oligopoly Dynamics (November 2006). FRB of Chicago Working Paper No. 2006-28; Tinbergen Institute Discussion Paper No. 06-110/3. Available at SSRN: http://ssrn.com/abstract=953750 or http://dx.doi.org/10.2139/ssrn.953750

Contact Information

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
Institute for the Study of Labor (IZA)
P.O. Box 7240
Bonn, D-53072
Germany
Jeffrey R. Campbell
Federal Reserve Bank of Chicago ( email )
230 South LaSalle Street
Chicago, IL 60604-1413
United States
312-322-6156 (Phone)
312-322-2357 (Fax)
HOME PAGE: http://www.nber.org/~jrc
Feedback to SSRN


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