Working Paper: CEPR ID: DP13255
Authors: Victor Aguirregabiria; Jihye Jeon
Abstract: This paper reviews recent literature on structural models of oligopoly competition where firms have biased beliefs about primitives of the model (e.g. demand, costs) or about the strategic behavior of other firms in the market. We describe different structural models that have been proposed to study this phenomenon and examine the approaches used to identify firms' beliefs. We discuss empirical results in recent studies and show that accounting for firms' biased beliefs and learning can have important implications on our measures and interpretation of market efficiency.
Keywords: beliefs; learning; dynamics; identification; oligopoly competition; structural models
JEL Codes: C57; D81; D83; D84; L13
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| firms' biased beliefs about demand and costs (D22) | pricing strategies (D49) |
| firms' biased beliefs about demand and costs (D22) | investment decisions (G11) |
| pricing strategies (D49) | market efficiency (G14) |
| investment decisions (G11) | market efficiency (G14) |
| biased beliefs (D91) | inefficiencies in the market (D61) |
| overestimation of competitors' capabilities (D80) | underinvestment in capacity (E22) |
| underinvestment in capacity (E22) | suboptimal market outcomes (D43) |
| learning processes (Bayesian learning) (C11) | interpretation of empirical results (C20) |
| firms' learning dynamics (L25) | understanding competitive behavior (L13) |
| firms' learning dynamics (L25) | market efficiency (G14) |