Simple Markov-perfect industry dynamics

Arbeitspapier

This paper develops a tractable model for the computational and empirical analysis of infinite-horizon oligopoly dynamics. It features aggregate demand uncertainty, sunk entry costs, stochastic idiosyncratic technological progress, and irreversible exit. We develop an algorithm for computing a symmetric Markov-perfect equilibrium quickly by finding the fixed points to a finite sequence of low-dimensional contraction mappings. If at most two heterogenous firms serve the industry, the result is the unique natural equilibrium in which a high profitability firm never exits leaving behind a low profitability competitor. With more than two firms, the algorithm always finds a natural equilibrium. We present a simple rule for checking ex post whether the calculated equilibrium is unique, and we illustrate the model's application by assessing how price collusion impacts consumer and total surplus in a market for a new product that requires costly development. The results confirm Fershtman and Pakes' (2000) finding that collusive pricing can increase consumer surplus by stimulating product development. A distinguishing feature of our analysis is that we are able to assess the results' robustness across hundreds of parameter values in only a few minutes on an off-the-shelf laptop computer.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: Working Paper ; No. 2010-21

Classification and Topics

• Classification: Wirtschaft ; Oligopoly and Other Imperfect Markets
• Subject: Sunk costs ; Demand uncertainty ; Markov-perfect equilibrium ; Learning-by-doing ; Technology innovation

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Abbring, Jaap H. ; Campbell, Jeffrey R. ; Yang, Nan
• Event: Veröffentlichung
• (who): Federal Reserve Bank of Chicago
• (where): Chicago, IL
• (when): 2010

Further information

• Handle: http://hdl.handle.net/10419/70593
• Last update: 10.03.2025, 11:43 AM CET