Working Paper: CEPR ID: DP16514
Authors: Victor Aguirregabiria; Allan Collard-Wexler; Stephen Ryan
Abstract: This survey is organized around three main topics: models, econometrics, and empirical applications. Section 2 presents the theoretical framework, introduces the concept of Markov Perfect Nash Equilibrium, discusses existence and multiplicity, and describes the representation of this equilibrium in terms of conditional choice probabilities. We also discuss extensions of the basic framework, including models in continuous time, the concepts of oblivious equilibrium and experience-based equilibrium, and dynamic games where firms have non-equilibrium beliefs. In section 3, we first provide an overview of the types of data used in this literature, before turning to a discussion of identification issues and results, and estimation methods. We review different methods to deal with multiple equilibria and large state spaces. We also describe recent developments for estimating games in continuous time and incorporating serially correlated unobservables, and discuss the use of machine learning methods to solving and estimating dynamic games. Section 4 discusses empirical applications of dynamic games in IO. We start describing the first empirical applications in this literature during the early 2000s. Then, we review recent applications dealing with innovation, antitrust and mergers, dynamic pricing, regulation, product repositioning, advertising, uncertainty and investment, airline network competition, dynamic matching, and natural resources. We conclude with our view of the progress made in this literature and the remaining challenges.
Keywords: dynamic games; industrial organization; market competition; structural models; estimation; identification; counterfactuals
JEL Codes: C57; C63; C73; L11; L13
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| adoption of dynamic games (C73) | more accurate representation of firm behavior (D21) |
| firms' strategies influenced by payoff-relevant state variables (L21) | impacts equilibrium outcomes such as prices and product quality (L15) |
| identification of structural parameters in dynamic games (C73) | accurately estimating effects of firms' strategic decisions on market outcomes (L10) |