Working Paper: CEPR ID: DP6212
Authors: Ulrich Doraszelski; Mark Satterthwaite
Abstract: We provide a general model of dynamic competition in an oligopolistic industry with investment, entry, and exit. To ensure that there exists a computationally tractable Markov perfect equilibrium, we introduce firm heterogeneity in the form of randomly drawn, privately known scrap values and setup costs into the model. Our game of incomplete information always has an equilibrium in cutoff entry/exit strategies. In contrast, the existence of an equilibrium in the Ericson & Pakes (1995) model of industry dynamics requires admissibility of mixed entry/exit strategies, contrary to the assertion in their paper, that existing algorithms cannot cope with. In addition, we provide a condition on the model's primitives that ensures that the equilibrium is in pure investment strategies. Building on this basic existence result, we first show that a symmetric equilibrium exists under appropriate assumptions on the model's primitives. Second, we show that, as the distribution of the random scrap values/setup costs becomes degenerate, equilibria in cutoff entry/exit strategies converge to equilibria in mixed entry/exit strategies of the game of complete information. Finally, we provide the first example of multiple symmetric equilibria in this literature.
Keywords: Dynamic Oligopoly; Industry Dynamics; Markov Perfect Equilibrium
JEL Codes: C73; L13
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| introduction of randomly drawn privately known scrap values and setup costs (D44) | equilibrium in cutoff entry/exit strategies (D43) |
| distribution of scrap values/setup costs (L99) | nature of symmetric equilibrium (C62) |
| distribution of scrap values becomes degenerate (D39) | equilibria in cutoff strategies converge to those in mixed strategies (C73) |
| dynamics of investment decisions, entry/exit choices, and market competition (D25) | multiple symmetric equilibria (C62) |