Last-In First-Out Oligopoly Dynamics

Abstract

This paper extends the static analysis of oligopoly structure into an infinite-horizon setting with sunk costs and demand uncertainty. The observation that exit rates decline with firm age motivates the assumption of last-in first-out dynamics: An entrant expects to produce no longer than any incumbent. This selects an essentially unique Markov-perfect equilibrium. With mild restrictions on the demand shocks, a sequence of thresholds describes firms' equilibrium entry and survival decisions. Bresnahan and Reiss's (1993) empirical analysis of oligopolists' entry and exit assumes that such thresholds govern the evolution of the number of competitors. Our analysis provides an infinite-horizon game-theoretic foundation for that structure.

A Microeconometric Model of Firm Turnover

“…The probability of entry or exit will be determined by the state of nature that the potential entrant or incumbent draws at the beginning of each decision period. The setup is similar to that developed by Abbring and Campbell [9] where firms observe market size and the number of firms operating in the previous period-these are the firms' "inherited" values. Just as in Abbring and Campbell [9], firms are named, i.e.…”

“…The setup is similar to that developed by Abbring and Campbell [9] where firms observe market size and the number of firms operating in the previous period-these are the firms' "inherited" values. Just as in Abbring and Campbell [9], firms are named, i.e. they are indexed by i and j.…”