We are grateful to Eugene Amromin, Gadi Barlevy, Allan Collard-Wexler, Meredith Crowley, Richard Rosen, a co-editor, and two anonymous referees for their insightful comments; to Tom Holmes for his discussion at the 2006 Duke–Northwestern–Texas IO Theory Conference; and to R. Andrew Butters for superb research assistance. The National Science Foundation supported this research through Grant 0137042 to the National Bureau of Economic Research. De Jonge Akademie of the Royal Netherlands Academy of Arts and Sciences supported this research through a travel grant. A replication file for this paper is available from the journal's web site (Abbring and Campbell (2010)). A project web site, with teaching materials and student exercises, is maintained at http://www.industrydynamics.org.
Last-In First-Out Oligopoly Dynamics
Article first published online: 12 OCT 2010
© 2010 The Econometric Society
Volume 78, Issue 5, pages 1491–1527, September 2010
How to Cite
Abbring, J. H. and Campbell, J. R. (2010), Last-In First-Out Oligopoly Dynamics. Econometrica, 78: 1491–1527. doi: 10.3982/ECTA6863
- Issue published online: 12 OCT 2010
- Article first published online: 12 OCT 2010
- Manuscript received December, 2006; final revision received January, 2009.
- Sunk costs;
- demand uncertainty;
- Markov-perfect equilibrium;
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, sequences of thresholds describe firms' equilibrium entry and survival decisions. Bresnahan and Reiss' (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.