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Last-In First-Out Oligopoly Dynamics

FRB of Chicago Working Paper No. 2006-28

Tinbergen Institute Discussion Paper No. 06-110/3

45 Pages Posted: 27 Dec 2006  

Jaap H. Abbring

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

Jeffrey R. Campbell

Federal Reserve Bank of Chicago; CentER, Tilburg University

Multiple version iconThere are 2 versions of this paper

Date Written: November 2006

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.

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

JEL Classification: L13

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: https://ssrn.com/abstract=953750 or http://dx.doi.org/10.2139/ssrn.953750

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

IZA Institute of Labor Economics

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.jyrc.org

CentER, Tilburg University ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands

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