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2 - Identification in Models of Oligopoly Entry

Published online by Cambridge University Press:  05 January 2013

Steven Berry
Affiliation:
Yale University
Elie Tamer
Affiliation:
Northwestern University
Richard Blundell
Affiliation:
University College London
Whitney K. Newey
Affiliation:
Massachusetts Institute of Technology
Torsten Persson
Affiliation:
Stockholms Universitet
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Summary

Abstract

In the empirical study of markets, models of entry are often used to study the nature of firms' profits and the nature of competition between firms. Most of these estimated models have been parametric. In this paper, we review and extend a number of results on the identification of models that are used in the empirical literature.We study simple versions of both static and dynamic entry models. For simple static models, we show how natural shape restrictions can be used to identify competition effects. We consider extensions to models with heterogeneous firms, mixed-strategy equilibria and private information and provide insights that can be used in these settings to conduct inference. In the case of dynamic models, we review existing results on the model with i.i.d. linear errors, and then consider more realistic cases, such as when the distribution of fixed costs is unknown.

INTRODUCTION

In the empirical study of markets, models of entry are often used to study the nature of firms' profits and the nature of competition between firms. The idea of these models is that firms enter into a market only when they expect to operate profitably; therefore, entry decisions can be used as an indicator of a latent profit function.

The study of entry into oligopoly markets is complicated by strategic interactions between firms. This means that traditional ideas in the econometric literature on discrete choice models have to be modified somewhat to account for these strategic interactions.

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Advances in Economics and Econometrics
Theory and Applications, Ninth World Congress
, pp. 46 - 85
Publisher: Cambridge University Press
Print publication year: 2006

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