Last-In First-Out Oligopoly Dynamics

Abbring, Jaap H.; Campbell, Jeffrey R.

doi:10.2139/ssrn.953750

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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

See all articles by Jaap H. Abbring

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

University of Notre Dame; Tilburg University

There 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: 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