Antitrust & Competition Policy Blog

Editor: D. Daniel Sokol
University of Florida
Levin College of Law

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Tuesday, February 3, 2009

Last-In First-Out Oligopoly Dynamics

Posted by D. Daniel Sokol

Jaap H. Abbring (Tilburg - Economics) and Jeffrey R. Campbell (University of Chicago - Economics) address Last-In First-Out Oligopoly Dynamics.

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, sequences of thresholds describe 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.

http://lawprofessors.typepad.com/antitrustprof_blog/2009/02/last-in-first-o.html

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