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Markov Perfect Industry Dynamics With Many Firms
Author(s) -
Weintraub Gabriel Y.,
Benkard C. Lanier,
Van Roy Benjamin
Publication year - 2008
Publication title -
econometrica
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 16.7
H-Index - 199
eISSN - 1468-0262
pISSN - 0012-9682
DOI - 10.3982/ecta6158
Subject(s) - markov chain , dynamics (music) , mathematical economics , economics , mathematics , statistics , physics , acoustics
We propose an approximation method for analyzing Ericson and Pakes (1995)‐style dynamic models of imperfect competition. We define a new equilibrium concept that we call 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. The great advantage of oblivious equilibria is that they are much easier to compute than are Markov perfect equilibria. Moreover, we show 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. This theorem justifies using oblivious equilibria to analyze Markov perfect industry dynamics in Ericson and Pakes (1995)‐style models with many firms.