Computable Markov-Perfect Industry Dynamics: Existence, Purification, and Multiplicity

Ulrich Doraszelski and Mark Satterthwaite

No 6212, CEPR Discussion Papers from C.E.P.R. Discussion Papers

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 (search for similar items in EconPapers)
JEL-codes: C73 L13 (search for similar items in EconPapers)
Date: 2007-03
New Economics Papers: this item is included in nep-bec, nep-com, nep-dge, nep-ent, nep-ind, nep-mic and nep-tid
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (24)

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