Markov Perfect Industry Dynamics With Many Firms

39 Pages Posted: 16 Dec 2005

See all articles by Gabriel Y. Weintraub

Gabriel Y. Weintraub

Stanford Graduate School of Business, Stanford University; Columbia University - Columbia Business School - Decision Risk and Operations

C. Lanier Benkard

Stanford Graduate School of Business; National Bureau of Economic Research (NBER)

Benjamin Van Roy

Stanford University - Management Science & Engineering

Multiple version iconThere are 3 versions of this paper

Date Written: February 2007

Abstract

We propose an approximation method for analyzing Ericson and Pakes (1995)-style dynamic models of imperfect competition. We define a new equilibrium concept that we call "oblivious equilibrium," in which each firm is assumed to make decisions based only on its own state and knowledge of the long run average industry state, but where firms ignore current information about competitors' states. The great advantage of oblivious equilibria is that they are much easier to compute than are Markov perfect equilibria. Moreover, we show that, as the market becomes large, if the equilibrium distribution of firm states obeys a certain "light-tail" condition, then oblivious equilibria closely approximate Markov perfect equilibria. This theorem justifies using oblivious equilibria to analyze Markov perfect industry dynamics in Ericson and Pakes (1995)-style models with many firms.

Keywords: economic theory, microeconomics

JEL Classification: C63, C73, L11, L13

Suggested Citation

Weintraub, Gabriel Y. and Benkard, C. Lanier and Van Roy, Benjamin, Markov Perfect Industry Dynamics With Many Firms (February 2007). Available at SSRN: https://ssrn.com/abstract=870482 or http://dx.doi.org/10.2139/ssrn.870482

Gabriel Y. Weintraub

Stanford Graduate School of Business, Stanford University ( email )

Stanford, CA 94305
United States

Columbia University - Columbia Business School - Decision Risk and Operations ( email )

New York, NY
United States

C. Lanier Benkard (Contact Author)

Stanford Graduate School of Business ( email )

Stanford, CA 94305-5015
United States
650-723-4124 (Phone)
650-725-0468 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Benjamin Van Roy

Stanford University - Management Science & Engineering ( email )

473 Via Ortega
Stanford, CA 94305-9025
United States

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