TY - JOUR
AU - Weintraub, Gabriel Y
AU - Benkard, C. Lanier
AU - Van Roy, Benjamin
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
DO - 10.3386/w16286
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: gweintra@stanford.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 -