Working Paper: CEPR ID: DP11069
Authors: Jaap H. Abbring; Jeffrey R. Campbell; Jan Tilly; Nan Yang
Abstract: This paper develops an econometric model of oligopoly dynamics that can be estimated very quickly from market-level observations of demand shifters and the number of producers. We show that the model has an essentially unique symmetric Markov-perfect equilibrium and provide an algorithm that calculates it quickly. We embed this algorithm in a nested fixed point estimation procedure and apply the result to U.S. local cinema markets. Estimates from County Business Patterns data point to very tough competition for film exhibition rights. Sunk costs make the industry's transition following a permanent demand shock last 10 to 15 years.
Keywords: Counterfactual policy analysis; Demand uncertainty; Dynamic oligopoly; Firm entry and exit; Nested fixed point estimator; Sunk costs; Toughness of competition
JEL Codes: C25; C73; L13
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| model structure (C52) | symmetric Markov-perfect equilibrium (C73) |
| sunk costs (G31) | adjustment to persistent demand shocks (E39) |
| sunk costs (G31) | transition to long-run equilibrium (D59) |
| policy interventions (D78) | toughness of competition (L13) |
| joint operating agreements (L24) | market structure (D49) |
| increased competition (L13) | diminished profits for existing firms (L11) |