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Federal Reserve Bank of Chicago
Working Paper Series
Very Simple Markov-Perfect Industry Dynamics: Empirics
Jaap H. Abbring
Jeffrey R. Campbell
Jan Tilly
Nan Yang
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.


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Jaap H. Abbring & Jeffrey R. Campbell & Jan Tilly & Nan Yang, Very Simple Markov-Perfect Industry Dynamics: Empirics, Federal Reserve Bank of Chicago, Working Paper Series WP-2018-17, 24 Jul 2018.
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Keywords: demand uncertainty; dynamic oligopoly; firm entry and exit; nested fixed point; estimator; sunk costs; toughness of competition; counterfactual policy analysis; Markov process
DOI: 10.21033/wp-2018-17
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