Last-In First-Out Oligopoly Dynamics
NBER Working Paper No. 14674
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'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.
Published: Jaap H. Abbring & Jeffrey R. Campbell, 2010. "Last-In First-Out Oligopoly Dynamics," Econometrica, Econometric Society, vol. 78(5), pages 1491-1527, 09.
An online appendix is available for this publication.