This paper presents a new approach to modeling transitional dynamics in dynamic models of imperfect competition, a crucial yet often neglected aspect of empirical models in industrial organization that seek to understand market responses to policy and environmental changes. We introduce Nonstationary Oblivious Equilibrium (NOE), a computationally efficient equilibrium concept based on a mean-field approximation designed to model short- and medium-run market dynamics. Addressing potential limitations of NOE in more concentrated markets or under aggregate shocks, we propose a variant, NOE with Re-solving (RNOE). RNOE modifies firms' strategies by re-computing NOE as industry states get realized; an iterative process inspired by real-world industry practice that has behavioral appeal. We show the potential of NOE and RNOE by applying them to an empirical setting of technology adoption and to two classic dynamic oligopoly models, demonstrating that, in a wide variety of settings of empirical interest, they generate equilibrium behavior that is close to Markov perfect equilibrium in both the short and long runs.
Authors
- Acknowledgements & Disclosure
- This paper grew out of (and substantially extends) our 2008 working paper “Nonstationary Oblivious Equilibrium”. We would like to thank Ben Van Roy for numerous fruitful conversations and valuable insights provided at the beginning stages of this project. This paper has also benefitted from conversations with Nikhil Agarwal, Paulo Somaini, Ali Yurukoglu, and seminar participants at various conferences and institutions. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.
- DOI
- https://doi.org/10.3386/w33045
- Pages
- 49
- Published in
- United States of America
Table of Contents
- NBER WORKING PAPER SERIES 1
- TRANSITIONAL MARKET DYNAMICS IN COMPLEX ENVIRONMENTS 1
- C. Lanier Benkard Przemyslaw Jeziorski Gabriel Weintraub 1
- Working Paper 33045 httpwww.nber.orgpapersw33045 1
- NATIONAL BUREAU OF ECONOMIC RESEARCH 1050 Massachusetts Avenue Cambridge MA 02138 October 2024 1
- Transitional Market Dynamics in Complex Environments C. Lanier Benkard Przemyslaw Jeziorski and Gabriel Weintraub NBER Working Paper No. 33045 October 2024 JEL No. D43 L0 L13 2
- C. Lanier Benkard Stanford Graduate School of Business 655 Knight Way Stanford CA 94305 and NBER lanierbstanford.edu 2
- Przemyslaw Jeziorski Haas School of Business 2220 Piedmont Avenue University of California at Berkeley Berkeley CA 94720-1900 przemekjhaas.berkeley.edu 2
- Gabriel Weintraub Graduate School of Business Stanford University 655 Knight Way Stanford CA 94305 gweintrastanford.edu 2
- A data appendix is available at httpwww.nber.orgdata-appendixw33045 2
- 1 Introduction 3
- 2 A Dynamic Model of Imperfect Competition 7
- 2.1 Model and Notation 7
- 2.2 Equilibrium 10
- 3 Nonstationary Oblivious Equilibrium 12
- 3.1 Nonstationary Oblivious Strategies and Entry Rate Functions 13
- 3.2 Sequence of Expected states and Value Functions 13
- 3.3 Equilibrium 15
- 3.4 Existence of NOE that Become Stationary 16
- 3.5 Algorithm to Compute NOE 16
- 3.6 Nonstationary Oblivious Equilibrium with Re-solving RNOE 17
- 4 Application to Technology diffusion 20
- 4.1 Model 21
- 4.2 Nonstationary Oblivious Equilibrium 22
- 4.3 Calibration of the Model and Subsidies 23
- 5 Application to Dynamic Oligopoly 25
- 5.1 Models Analyzed 25
- 5.2 Comparison of OE RNOE and MPE 28
- 5.3 Summary of findings 32
- 6 Conclusion 33
- References 35
- A Proof of Theorem 3.1 38
- A.1 Preliminaries 38
- A.2 Outline of Proof 39
- A.3 Lemmas 39
- A.4 Proof Theorem 3.1 41
- B Technology adoption Single-period payoffs 42
- C Code for RT model 43
- C.1 Oblivious Equilibrium 43
- C.2 Nonstationary OE 43
- D Tables and Figures 45
- Figure 1 Comparison of uniform feasible subsidy and optimal subsidy. 45
- Table 1 Parameters for numerical simulations 45
- Figure 2 Comparison of the dynamics in predicted consumer surplus producer surplus and aver- age investment Quality-Ladder model low investment cost. 46
- Figure 3 Comparison of the dynamics in predicted consumer surplus producer surplus and aver- age investment Quality-Ladder model moderate investment cost. 46
- Figure 4 Comparison of the dynamics in predicted consumer surplus producer surplus and aver- age investment Quality-Ladder model high investment cost. 47
- Figure 5 Comparison of the dynamics in predicted consumer surplus producer surplus and aver- age investment Quantity-Cost competition low investment cost. 47
- Figure 6 Comparison of the dynamics in predicted consumer surplus producer surplus and aver- age investment Quantity-Cost competition high investment cost. 48
- Figure 7 Comparison of the dynamics in average investment Quality-Ladder model with aggre- gate shocks low investment cost. The panels show low medium and high value of the shock at respectively. 48
- Figure 8 Comparison of the dynamics in average investment Quality-Ladder model with aggre- gate shocks high investment cost. The panels show low medium and high value of the shock at respectively. 49
- Figure 9 Average absolute deviation error Quality-Ladder model low investment cost 49
