Empirical Models of Industry Dynamics with Endogenous Market Structure

Steven Berry () and Giovanni Compiani ()
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Giovanni Compiani: Booth School of Business, University of Chicago, Chicago, Illinois 60637, USA

Annual Review of Economics, 2021, vol. 13, issue 1, 309-334

Abstract: This article reviews recent developments in the study of firm and industry dynamics, with a special emphasis on the econometric endogeneity of market structure. The endogeneity of market structure follows from the presence of serially correlated unobservable shocks to the profitability of firms’ dynamic decisions, a feature common to many empirical settings. Methods that ignore endogeneity can lead to misleading parameter estimates and misleading counterfactual results. We pay particular attention to extensions of standard two-step methods that leverage instrumental variables to address endogeneity in both single-agent and oligopoly models. A first step set-identifies dynamic policy functions together with serial correlation parameters, and a second step quickly solves for profit function parameters using an extension of existing forward-simulation methods. We discuss how these new methods provide a general solution to initial-conditions problems and how they can yield practical estimation strategies.

Keywords: dynamic models; endogenous market structure; autocorrelation; state dependence; two-step methods (search for similar items in EconPapers)
JEL-codes: C23 C26 L11 (search for similar items in EconPapers)
Date: 2021
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Citations: View citations in EconPapers (2)

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DOI: 10.1146/annurev-economics-081720-120019

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