Computable markov-perfect industry dynamics

Ulrich Doraszelski*, Mark Satterthwaite

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

89 Scopus citations

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 and Pakes' model of industry dynamics requires admissibility of mixed entry/exit strategies, contrary to the assertion in their article, 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.

Original languageEnglish (US)
Pages (from-to)215-243
Number of pages29
JournalRAND Journal of Economics
Volume41
Issue number2
DOIs
StatePublished - 2010

ASJC Scopus subject areas

  • Economics and Econometrics

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