Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/86230
Authors: 
Abbring, Jaap H.
Campbell, Jeffrey R.
Year of Publication: 
2006
Series/Report no.: 
Tinbergen Institute Discussion Paper 06-110/3
Abstract: 
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, a sequence of thresholds describes 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.
Subjects: 
Sunk costs
Demand uncertainty
Markov-Perfect equilibrium
LIFO
JEL: 
L13
Document Type: 
Working Paper

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