Recent developments in empirical IO: dynamic demand and dynamic games

Empirically studying dynamic competition in oligopoly markets requires dealing with large states spaces and tackling difficult computational problems, while handling heterogeneity and multiple equilibria. In this paper, we discuss some of the ways recent work in Industrial Organization has dealt with these challenges. We illustrate problems and proposed solutions using as examples recent work on dynamic demand for differentiated products and on dynamic games of oligopoly competition. Our discussion of dynamic demand focuses on models for storable and durable goods and surveys how researchers have used the "inclusive value" to deal with dimensionality problems and reduce the computational burden. We clarify the assumptions needed for this approach to work, the implications for the treatment of heterogeneity and the different ways it has been used. In our discussion of the econometrics of dynamics games of oligopoly competition, we deal with challenges related to estimation and counterfactual experiments in models with multiple equilibria. We also examine methods for the estimation of models with persistent unobserved heterogeneity in product characteristics, firms’ costs, or local market profitability. Finally, we discuss different approaches to deal with large state spaces in dynamic games.Industrial Organization; Oligopoly competition; Dynamic demand; Dynamic games; Estimation; Counterfactual experiments; Multiple equilibria; Inclusive values; Unobserved heterogeneity.

Recent Developments in Empirical IO: Dynamic Demand and Dynamic Games

Empirically studying dynamic competition in oligopoly markets requires dealing with large states spaces and tackling difficult computational problems, while handling heterogeneity and multiple equilibria. In this paper, we discuss some of the ways recent work in Industrial Organization has dealt with these challenges. We illustrate problems and proposed solutions using as examples recent work on dynamic demand for differentiated products and on dynamic games of oligopoly competition. Our discussion of dynamic demand focuses on models for storable and durable goods and surveys how researchers have used the \Industrial Organization; Oligopoly competition; Dynamic demand; Dynamic games; Estimation; Counterfactual experiments; Multiple equilibria; Inclusive values; Unobserved heterogeneity.

Dynamic Common Agency, Vertical Integration, and Investment: The Economics of Movie Distribution

This paper analyzes the impact of vertical integration on investment and other strategies in a dynamic common agency framework. Movie distribution is used as a motivating example. The model matches several facts about movie distribution; distributors avoid head-to-head new hit releases, hits have longer runs than flops, and distributors receive the lion’s share of value generated by hits. Welfare comparisons show that integration is privately profitable and may improve social welfare even though it reduces industry profits. The e.ects of integration on strategies and welfare depend critically on how integration a.ects the bargaining power of the non-integrated firm.common agency; exclusive dealing; entertainment; film; licensing

A Dynamic Analysis of the Market for Wide-Bodied Commercial Aircraft

This paper develops a multi-agent dynamic model of the commercial aircraft industry and then uses that model to analyze industry pricing, industry performance, and optimal industry policy. In the model, firms are differentiated in their products and cost structure, and entry, exit, prices, and quantity sold are endogenously determined in dynamic equilibrium. Re ecting the focus of the paper, demand and supply are modeled structurally, while investment is modeled in reduced form. The model utilizes a cost model of commercial aircraft production developed and estimated in a previous paper (Benkard (2000)), and a discrete choice model of commercial aircraft demand to determine static profits. I find that many unusual aspects of the aircraft data, such as high concentration and pricing below the level of static marginal cost, are explained by this model. The model also replicates the stochastic evolution of the industry well. Many of these properties could not be explained with a static model. These results provide support for the structural dynamic modeling approach in general. I also find that the unconstrained Markov perfect equilibrium is quite efficient from a social perspective, providing only 9% less welfare on average than a social planner would obtain, but that the Markov perfect equilibrium shifts a substantial amount of welfare from consumers to producers. Finally, I provide simulation evidence that an anti-trust policy in the form of a concentration restriction would be welfare reducing with high probability.

Over-the-Counter Markets

We study how intermediation and asset prices in over-the-counter markets are affected by illiquidity associated with search and bargaining. We compute explicitly the prices at which investors trade with each other as well as marketmakers' bid and ask prices in a dynamic model with strategic agents. Bid-ask spreads are lower if investors can more easily find other investors, or have easier access to multiple marketmakers. With a monopolistic marketmaker, bid-ask spreads are higher if investors have easier access to the marketmaker. We characterize endogenous search and welfare, and discuss empirical implications.

Dynamic Spatial Competition Between Multi-Store Firms

We propose a dynamic model of an oligopoly industry characterized by spatial competition between multi-store firms. Firms compete in prices and decide where to open or close stores depending on demand conditions and the number of competitors at different locations, and on location-specific private-information shocks. We provide an algorithm to compute Markov Perfect Equilibria (MPE) in our model. We conduct several numerical experiments to study how the propensity of multi-store retailers to spatial preemptive behavior depends on the magnitude of entry costs, exit value and transportation costs.Spatial competition; Market dynamics; Sunk costs; Spatial preemptive behavior.

Information Aggregation and Strategic Trading in Speculative Markets

This paper examines the process by which private information is impounded in security prices in a market where some traders are consistently better informed about short-run asset values. We analyze equilibria where traders can adopt general non-cooperative strategies, and characterize the 'best' attainable equilibrium. Trading strategies in this equilibrium are nonlinear functions of information signals and exhibit history dependence. In contrast to previous papers, competition among informed traders need not lead to rapid revelation of private information. Although the volatility of fundamental prices is constant, transaction prices may exhibit time-varying volatility. Finally, in contrast to linear models, the degree to which prices impound private information depends on the signal itself

Price and Inventory Dynamics in an Oligopoly Industry: A Framework for Commodity Markets

This paper analyzes the interaction between price and inventory decisions in an oligopoly industry and its implications for the dynamics of prices. The work extends existing literature and especially the work of Hall and Rust (2007) to endogenous prices and strategic oligopoly competition. We show that the optimal decision rule is an (S, s) order policy and prices and inventory are strategic substitutes. Fixed ordering costs generate infrequent orders. Consequently, with strategic competition in prices, (S, s) inventory behavior together with demand uncertainty generates endogenous cyclical patterns in prices without any exogenous shocks. Hence, the developed model provides a promising framework for explaining dynamics of commodity markets and especially observed autocorrelation in price fluctuations.Inventory dynamics, price competition, oligopoly, (S, s) order policy, commodity markets.