Very Simple Markov-Perfect Industry Dynamics: Empirics

Very Simple Markov-Perfect Industry Dynamics: Empirics

By:	Abbring, Jaap H. (Tilburg University); Campbell, Jeffrey R. (Federal Reserve Bank of Chicago); Tilly, Jan (QuantCo, Inc.); Yang, Nan (National Univerrsity of Singapore)
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:	C25 C73 L13
Date:	2018–07–24
URL:	http://d.repec.org/n?u=RePEc:fip:fedhwp:wp-2018-17&r=com