Empirical Models of Industry Dynamics with Endogenous Market Structure

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’ [Formula: see text] 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. Expected final online publication date for the Annual Review of Economics, Volume 13 is August 2021. Please see http://www.annualreviews.org/page/journal/pubdates for revised estimates.

An Instrumental Variable Approach to Dynamic Models

“…This work again emphasizes limited forms of discrete heterogeneity. In Berry and Compiani (2020) we show that our framework includes the class of models they consider as a special case. A key restriction in Kasahara and Shimotsu (2009) is that the variation in unobservables is in some well-defined sense lower-dimensional than the variation in the observed data.…”

“…Assumption 1 is high-level assumption. In Berry and Compiani (2020), we show the indi↵erence conditions in ( 18) are a natural extension of equations employed in the HMSS second-step for multinomial discrete choice with independent errors. Not all second-step CCP methods generalize easily (or at all) to the case of serial correlation, but this one does.…”

Modelling the impact of intellectual property protection and spillovers on attracting foreign direct investment

“…paradigm is widely utilised in industrial organisational analysis, the S.C.P. paradigm has also been criticised for overemphasising the importance of a current/given market structure and ignoring industrial dynamics (Anderson, 2020;Berry & Compiani, 2021). It provides little explanation regarding the evolution of industries.…”

Dynamic Games in Empirical Industrial Organization

“…Previous survey papers on dynamic games in IO include Doraszelski and Pakes 2007, Arcidiacono and Ellickson 2011, Aguirregabiria and Nevo 2013, and Berry and Compiani 2021. Doraszelski and Pakes 2007 deal with algorithms for computing MPNE in dynamic games.…”

“…Kasahara and Shimotsu 2009 have derived sufficient conditions for the nonparametric identification of market-type CCPs {P 0 ℓ } and the probability distribution of market types, {λ 0 ℓ }. Given the nonparametric identification of market-type CCPs, it is possible to estimate structural parameters using a two-step approach similar to the one described above.Berry and Compiani 2020 (see alsoBerry and Compiani 2021) advance a generalized instrumental variable approach, following the more abstract approach to this problem outlined in Chesher and Rosen 2017, to estimating dynamic models with serially correlated unobservables allowed to change over time. Their instrumental variables approach relies on the existence of observable covariates that are uncorrelated with the unobservable component of the payoff function, do not directly enter the present period policy function, but are…”