TY  - JOUR
AU  - Weintraub,Gabriel
AU  - Benkard,C. Lanier
AU  - Roy,Ben Van
TI  - Markov Perfect Industry Dynamics with Many Firms
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 11900
PY  - 2005
Y2  - December 2005
UR  - http://www.nber.org/papers/w11900
L1  - http://www.nber.org/papers/w11900.pdf
N1  - Author contact info:
Gabriel Weintraub
Columbia Business School, Uris 402
3022 Broadway
New York, NY 10027, U.S.A.
E-Mail: gweintraub@columbia.edu

C. Lanier Benkard
Stanford Graduate School of Business
655 Knight Way
Stanford, CA 94305
Tel: 650 725-2173
E-Mail: lanierb@stanford.edu

Benjamin Van Roy
Mangagement Science and Engineering
Stanford University
Terman 315
Stanford, CA 94305-4026
Tel: 650/725-0544
Fax: 650/723-4107
E-Mail: bvr@stanford.edu
AB  - We propose an approximation method for analyzing Ericson and Pakes (1995)-style dynamic models of imperfect competition. We develop a simple algorithm for computing an ``oblivious equilibrium,'' in which each firm is assumed to make decisions based only on its own state and knowledge of the long run average industry state, but where firms ignore current information about competitors' states. We prove that, as the market becomes large, if the equilibrium distribution of firm states obeys a certain ``light-tail'' condition, then oblivious equilibria closely approximate Markov perfect equilibria. We develop bounds that can be computed to assess the accuracy of the approximation for any given applied problem. Through computational experiments, we find that the method often generates useful approximations for industries with hundreds of firms and in some cases even tens of firms.
ER  -