TY - JOUR AU - Weintraub,Gabriel Y. AU - Benkard,C. Lanier AU - Roy,Benjamin Van TI - Industry Dynamics: Foundations For Models with an Infinite Number of Firms JF - National Bureau of Economic Research Working Paper Series VL - No. 16286 PY - 2010 Y2 - August 2010 UR - http://www.nber.org/papers/w16286 L1 - http://www.nber.org/papers/w16286.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 - This paper explores the connection between three important threads of economic research offering different approaches to studying the dynamics of an industry with heterogeneous firms. Finite models of the form pioneered by Ericson and Pakes (1995) capture the dynamics of a finite number of heterogeneous firms as they compete in an industry, and are typically analyzed using the concept of Markov perfect equilibrium (MPE). Infinite models of the form pioneered by Hopenhayn (1992), on the other hand, consider an infinite number of infinitesimal firms, and are typically analyzed using the concept of stationary equilibrium (SE). A third approach uses oblivious equilibrium (OE), which maintains the simplifying benefits of an infinite model but within the more realistic setting of a finite model. The paper relates these three approaches. The main result of the paper provides conditions under which SE of infinite models approximate MPE of finite models arbitrarily well in asymptotically large markets. Our conditions require that the distribution of firm states in SE obeys a certain “light-tail” condition. In a second set of results, we show that the set of OE of a finite model approaches the set of SE of the infinite model in large markets under a similar light-tail condition. ER -