Industry Dynamics: Foundations For Models with an Infinite Number of Firms

Gabriel Y. Weintraub, C. Lanier Benkard, Benjamin Van Roy

NBER Working Paper No. 16286
Issued in August 2010
NBER Program(s):Industrial Organization

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.

download in pdf format
   (358 K)

email paper

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w16286

Published: Industry Dynamics: Foundations for Models with an In nite Number of Firms," (with Gabriel Weintraub and Benjamin Van Roy), Journal of Economic Theory , September 2011.

Users who downloaded this paper also downloaded* these:
Kaplow w16268 Taxes, Permits, and Climate Change
Baldwin and Okubo w16660 International Trade, Offshoring and Heterogeneous Firms
Kolstad w16303 Regulatory Choice with Pollution and Innovation
Curtis and Mark w16154 Business Cycles, Consumption and Risk-Sharing: How Different Is China?
Cogan and Taylor w16505 What the Government Purchases Multiplier Actually Multiplied in the 2009 Stimulus Package
NBER Videos

National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email:

Contact Us