Working Paper: CEPR ID: DP3965
Authors: Martin Pesendorfer; Philipp Schmidt-Dengler
Abstract: This Paper studies the identification problem in infinite horizon Markovian games and proposes a generally applicable estimation method. Every period firms simultaneously select an action from a finite set. We characterize the set of Markov equilibria. Period profits are a linear function of equilibrium choice probabilities. The question of identification of these values is then reduced to the existence of a solution to this linear equation system. We characterize the identification conditions. We propose a simple estimation procedure that follows the steps in the identification argument. The estimator is consistent, asymptotic normally distributed, and efficient.We have collected quarterly time series data on pubs, restaurants, coffeehouses, bakeries and carpenters for two Austrian towns between 1982 and 2002. A dynamic entry game is estimated in which firms simultaneously decide whether to enter, remain active, or exit the industry. The period profit estimates are used to simulate the equilibrium behaviour under a policy experiment in which a unit tax is imposed on firms deciding to enter the industry.
Keywords: entry games; estimation of dynamic oligopoly
JEL Codes: D43; D99; L10
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| identification of period profits (G35) | identification of profit parameters (D22) |
| linear equation system derived from indifference conditions among firms (D21) | identification of period profits (G35) |
| continuation values of actions must be equal (D46) | identification of period profits (G35) |
| proposed estimator (C51) | simulation of equilibrium behavior under different policy experiments (D58) |
| identification of profit parameters is contingent upon certain restrictions being satisfied (D22) | identification of profit parameters (D22) |
| restricted matrix has full column rank (C30) | identification of profit parameters (D22) |
| model captures strategic interactions among firms effectively (D43) | implications on the dynamics of entry and exit in the industry (L11) |