Very Simple Markov-Perfect Industry Dynamics: Empirics

63 Pages Posted: 10 Dec 2018 Last revised: 29 Apr 2020

See all articles by Jaap H. Abbring

Jaap H. Abbring

Tilburg University

Jeffrey R. Campbell

University of Notre Dame; Tilburg University

Jan Tilly

University of Pennsylvania - Department of Economics

Nan Yang

National University of Singapore (NUS)

Date Written: July, 2018

Abstract

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

Suggested Citation

Abbring, Jaap H. and Campbell, Jeffrey R. and Tilly, Jan and Yang, Nan, Very Simple Markov-Perfect Industry Dynamics: Empirics (July, 2018). FRB of Chicago Working Paper No. WP-2018-17, Available at SSRN: https://ssrn.com/abstract=3298008 or http://dx.doi.org/10.21033/wp-2018-17

Jaap H. Abbring (Contact Author)

Tilburg University

P.O. Box 90153
Tilburg, DC Noord-Brabant 5000 LE
Netherlands

Jeffrey R. Campbell

University of Notre Dame ( email )

United States

Tilburg University ( email )

Tilburg, 5000 LE
Netherlands

Jan Tilly

University of Pennsylvania - Department of Economics ( email )

Ronald O. Perelman Center for Political Science
133 South 36th Street
Philadelphia, PA 19104-6297
United States

Nan Yang

National University of Singapore (NUS) ( email )

1E Kent Ridge Road
NUHS Tower Block Level 7
Singapore, 119228
Singapore

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