Working Paper: NBER ID: w14674
Authors: Jaap H. Abbring; Jeffrey R. Campbell
Abstract: This paper extends the static analysis of oligopoly structure into an infinite-horizon setting with sunk costs and demand uncertainty. The observation that exit rates decline with firm age motivates the assumption of last-in first-out dynamics: An entrant expects to produce no longer than any incumbent. This selects an essentially unique Markov-perfect equilibrium. With mild restrictions on the demand shocks, sequences of thresholds describe firms' equilibrium entry and survival decisions. Bresnahan and Reiss's (1993) empirical analysis of oligopolists' entry and exit assumes that such thresholds govern the evolution of the number of competitors. Our analysis provides an infinite-horizon game-theoretic foundation for that structure.
Keywords: sunk costs; demand uncertainty; markov-perfect equilibrium; lifo
JEL Codes: L13
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| demand uncertainty (D89) | exit thresholds (J63) |
| demand uncertainty (D89) | entry thresholds (C24) |
| firm age (L10) | exit behavior (Y60) |
| firm entry (M13) | expected longevity of production (D25) |
| demand shocks (E39) | firms' strategic decisions (L21) |
| entry and survival decisions (L26) | thresholds (C24) |