Computational Issues in the Analysis of Simple IO Models: A Report from the Applied Front

Ariel Pakes

Computing in Economics and Finance 1996 from Society for Computational Economics

Abstract: There has been progress in estimating the demand and cost primitives underlying the static profit and consumer surplus functions derived from simple IO models. This delivers profits and consumer surplus as a function of the distribution of the state variables of the agents active in the market, and has lead to an increase in our ability to do short run analysis of the impact of policy or environmental changes. However the analysis of even intermediate run responses requires some analysis of how the state variables themselves respond to environmental changes. Realistic dynamic models for analyzing the response of state variables are far too complicated for us to solve analytically. On the other hand our ability to generate parameter estimates, together with some assumptions on the nature of equilibrium, should, at least modulus computational problems, allow us to do numerical analysis of these models. This talk will consider the problems and prospects we have encountered in computing Markov Perfect models (Maskin and Tirole,n1988) of industry dynamics, with an eye to generating an ability to compute models that are rich enough to be of use in applied problems. We begin by introducing the skeleton of a model that might be of use in applied work, and then consider the problems associated with computing its equilibrium.

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