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

Access Documents

File(s): File format is application/pdf https://www.chicagofed.org/~/media/publications/working-papers/2018/wp2018-17-pdf.pdf
Description: Full text

Authors

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