With Nan Yang and, in part, Jan Tilly, we are developing empirical methods for the analysis of dynamic oligopoly models that are centered around fast equilibrium computation.
This paper develops an econometric model of industry dynamics for concentrated markets that can be estimated very quickly from market-level data on demand shifters and the number of producers. We show that the model has an essentially unique symmetric Markov-perfect equilibrium that can be calculated from the fixed points of low-dimensional contraction mappings. We characterize the model's identification and extend Rust's (1987) nested fixed point estimator to account for the observable implications of mixed strategies on survival. We illustrate the model's application with ten years of County Business Patterns data from Motion Picture Theaters in 573 Micropolitan Statistical Areas.
Abbring, Jaap H., Jeffrey R. Campbell, and Nan Yang (2012), “Sunk Costs, Entry, and Exit in Dynamic Oligopoly”, In progress.
This paper develops a dynamic econometric framework for the analysis of entry, exit, and competitive conduct in oligopolistic markets. This framework only requires panel data on the demand and structures of geographically dispersed markets over time. It is a dynamic extension of Bresnahan and Reiss’s (1990; 1991) framework for the analysis of static competition in a cross-section of markets. This extension facilitates the empirical analysis of the genuinely dynamic determinants of market structure and competition: sunk entry costs and uncertainty. Moreover, it is needed for the consistent measurement of static market primitives, such as the toughness of price competition, in such genuinely dynamic markets. Timing and expectation assumptions ensure that our model has a unique Markov perfect equilibrium that can be computed quickly by solving a finite sequence of low-dimensional Markov discrete decision problems. We develop and implement a nested-fixed-point algorithm for the estimation of the model. We apply our method to the empirical re-analysis of sunk costs and the toughness of competition in the US market for dental services, using Bresnahan and Reiss’s (1993) panel data on the number of dentists across geographical markets in the US.