Working Paper
Very Simple Markov-Perfect Industry Dynamics: Empirics
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 Classification: C25; C73; L13;
https://doi.org/10.21033/wp-2018-17
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Bibliographic Information
Provider: Federal Reserve Bank of Chicago
Part of Series: Working Paper Series
Publication Date: 2018-07-24
Number: WP-2018-17
Pages: 63 pages