ECON 881-15 Entry Models Fall 2014

Graduate Economics Module, 881-15

Allan Collard-Wexler
Soc Sci 327, Spring 1 Module

Entry Games

This course focuses on empirical methods for estimating games. In Industrial Organization this is often called the "entry game literature"; because it is used to model endogenous market structure. The aim of the course is to introduce students to the methods of solving and estimating static and dynamic games, as well as showing some of the ways that these games can be used. Some knowledge of demand models, dynamic programming and game theory will be assumed. Relative to the typical class in entry games, we will spend somewhat more time looking into the theory and computation side of dynamic games.

Problem Sets and Exams: there will be four problem sets that will determine your grade for the course. The problem sets are vital for understanding what is going on, not an optional extra. As well, each week one of you will be randomly selected to present a paper – the protocol famously used by Thomas Sargent in his reading group. Furthermore, I expect you to actively participate in class; comments in seminars and talks are important sources of feedback.

Background: I expect all of you to have micro background on the order of what is covered in MGW. As well, I expect exposure to econometrics on the order of what it is in Wooldridge. There will also be some dynamic programming involved. Finally, this class will require you to be able to program. I expect you to have a working knowledge of MATLAB and STATA, or equivalent software (such as R or Java, C++). However, it will be advantageous for you to settle on software that is part of the current equilibrium in economics.

Reading List:

For background on theoretical IO: Paul Belleflamme and Martin Peitz, Industrial Organization: Markets and Strategies, Cambridge University Press, 2010 and Jean Tirole, The Theory of Industrial Organization, MIT, 1987 (dated, but the Bible to some extent). I would definitively buy Tirole if you think

For background on empirical issues: Peter Davis and Eliana Garces, Quantitative Techniques for Competition and Anti-trust Analysis, Princeton, 2010 which is aimed at a mixed academic/antitrust economist audience.

You may also want to consult an econometrics textbook on a regular basis: I would recommend Wooldridge';s Econometric Analysis of Cross-Section and Panel Data textbook. I also think that some combination of Judd';s Numerical Methods in Economics, and Ada and Cooper';s Dynamic Economics, are two other references that I have kept on my desk for years.

There are also two useful Handbook chapters:

  • D. Ackerberg, L. Benkard, S. Berry and A. Pakes, Econometric Tools for Analyzing Market Outcomes.

  • U Dorazelski and A Pakes, A Framework for Applied Dynamic Analysis in IO.

In the following reading list, the papers marked * * * are the ones that I will likely want you to present. As well, I';ve marked papers with * as my recommendations on where to get started. The unmarked papers I will not assume that you';ve read, and these papers are things that you might return to at a later point in time.

How to be a graduate student: A common misperception of many second year Ph.D. students is that they can act as students, much as they would during their undergraduate or master student days. Instead, you should think of the post first year of a Ph.D. as an apprenticeship into the profession of research. In other words, the rules of being a faculty member in training apply to you as an upper level Ph.D. student.

First, you should be attending seminars each week, two every week is a normal rate, as well as going to one of the workshop lunches. Seminars attendance is the only way to learn how to present your research, and after a year or two, you will have a good feel for it. If you don';t go to seminar, you are wasting your time in graduate school.

Second, you will soon be looking for advisors. It is important to not waste your advisors time. This means sending written drafts of what you have been working on, or research proposals that you can give them ahead of meetings. As well, meeting with your advisor every two weeks is normal. The main reason for regular contact is so that you can get feedback before spending a second week on something that turns out to be a dead end, and so that you don';t fall off your advisors radar.

CLASS 1: INTRODUCTION TO GAMES AND ENDOGENOUS MARKET STRUCTURE

History of IO—SPC Analysis.

Pre-Class Reading:

Davis, p. 256-282

Theory on Market Entry

Tirole, chapters 7, 8

(more details of Sutton';s model of the size distribution are contained in Technology and Market Structure)

Empirical Facts

Problem Set 1: Theory piece; models of endogenous market structure versus the margin – competition regression.

CLASS 2: STATIC ENTRY GAMES — CLASSICS

  • T. Bresnahan and P. Reiss, "Entry and Competition in Concentrated Markets," Journal of Political Economy, 99 (October 1991), pp. 977-1009

  • S. Berry, "Estimation of a Model of Entry in the Airline Industry", Econometrica, 1992, 889-918,

  • M. Mazzeo, "Product Choice and Oligopoly Market Structure," RAND Journal of Economics, 2002, 221-42

  • K. Seim, "Spatial Differentiation and Firm Entry: The Video Retail Industry," RAND, 2006, 619-640

  • P. Bajari, H. Hong and S. Ryan, "Identification and Estimation of Discrete Games of Complete Information", Econometrica.

  • (***) S. Berry and J. Waldfogel, "Free Entry and Social Inefficiency in Radio Broadcasting" Rand Journal of Economics, 30 (Autumn 1999), 397-420.

  • Steve Berry and Joel Waldfogel (2010) "Product Quality and Market Size", Journal of Industrial Organization, 58(1), http://dx.doi.org/10.1111/j.1467-6451.2010.00404.x

CLASS 3: STATIC ENTRY GAMES — MULTIPLE EQUILIBRIA, SUNK COSTS AND MODERN TECHNIQUES AND APPLICATIONS

  • F. Ciliberto and E. Tamer (2009), "Market Structure and Multiple Equilibria in Airline Markets", Econometrica, 77(6), 1468-0262, http://dx.doi.org/10.3982/ECTA5368 .

  • Ariel Pakes, "Alternative Models for Moment Inequalities", 2010, Econometrica (Frisch lecture given at Econometric Society World Congress)

  • Kate Ho and Ariel Pakes (2014) "Hospital Choices, Hospital Prices and Financial Incentives to Physicians" American Economic Review 2014, 104(12): 3841-84.

  • (***) Thomas Wollman "Trucks without Bailouts: Equilibrium Product Characteristics for Commercial Vehicles", working paper, University of Chicago, 2016.

  • Eizenberg A. (2014) "Upstream Innovation and Product Variety in the U.S. Home PC Market" Review of Economic Studies , 81(3):1003-45.

Problem Set 2: Moment Inequalities, and Classic Methods for Estimating Entry Games.

CLASS 4: DYNAMIC ENTRY GAMES — THEORY + SOME FACTS

Theory Background

  • Jovanovic, Boyan (1982) "Selection and the Evolution of Industry" Econometrica, Vol. 50, No. 3 (May, 1982), pp. 649-670, http://www.jstor.org/stable/1912606.

  • Hugo A. Hopenhayn (1992) "Entry, Exit, and firm Dynamics in Long Run Equilibrium" Econometrica, Vol. 60, No. 5 (Sep., 1992), pp. 1127-1150, http://www.jstor.org/stable/2951541

  • Ulrich Doraszelski and Mark Satterthwaite (2010) "Computable Markov-perfect industry dynamics", The RAND Journal of Economics, Vol. 41, No. 2 (Summer ';10), pp. 215-243 http://www.jstor.org/stable/40649298.

or the handbook of IO chapter by Doraszelski and Pakes is a far clearer version of:

  • Richard Ericson and Ariel Pakes (1995) "Markov-Perfect Industry Dynamics: A Framework for Empirical Work" The Review of Economic Studies, Vol. 62, No. 1 (Jan., 1995), pp. 53-82, http://www.jstor.org/stable/2297841.

  • Jaap H. Abbring and Jeffrey R. Campbell (2010) "Last-In First-Out Oligopoly Dynamics" Econometrica, Volume 78, Issue 5, pages 1491–1527.

Facts

  • (***)L. Benkard, "Learning and Forgetting: the Dynamics of Aircraft Production", AER, 2000, 1034-1054

  • Marcus Asplund and Volker Nocke (2006) "Firm Turnover in Imperfectly Competitive Markets" The Review of Economic Studies, Vol. 73, No. 2 (Apr., 2006), pp. 295-327
    http://www.jstor.org/stable/3700641

  • Nicholas Buchholz (2016) "Spatial Equilibrium, Search Frictions and Efficient Regulation in the Taxi Industry" working paper Princeton.

CLASS 5: DYNAMIC ENTRY GAMES — COMPUTATION

Methods

  • A. Pakes and P. McGuire, "Computing Markov-Perfect Nash Equilibria: Numerical Implications of a Dynamic Differentiated Product Model", RAND, 1994, 555-588.

  • Ulrich Doraszelski, Kenneth Judd (2011), Avoiding the Curse of Dimensionality in Dynamic Stochastic Games, Quantitative Economics, 3 (1), 53 – 93

  • A. Pakes and P. McGuire (2001) "Stochastic Algorithms, Symmetric Markov Perfect Equilibrium, and the ';curse'; of Dimensionality", Econometrica, 69(5), http://dx.doi.org/10.1111/1468-0262.00241.

  • Fershtman, Chaim, and Ariel Pakes. "Dynamic games with asymmetric information: A framework for empirical work." The Quarterly Journal of Economics (2012).

  • V. Farias, D. Saure, G. Weintraub (2012) "An approximate dynamic programming approach to solving dynamic oligopoly models" The RAND Journal of Economics, 43(2), pp. 1756-2171, http://dx.doi.org/10.1111/j.1756-2171.2012.00165.x .

  • (*** ) Gabriel Weintraub, Bar Ifrach (2016) "A Framework for Dynamic Oligopoly in Concentrated Industries" The Review of Economic Studies ( forthcoming ).

Applications

Problem Set 3: Dynamic Oligopoly Game Solution Computational.

CLASS 6: DYNAMIC ENTRY GAMES — ESTIMATION

  • Hotz, V. Joseph, et al. "A simulation estimator for dynamic models of discrete choice." The Review of Economic Studies 61.2 (1994): 265-289.

  • (***) P. Bajari, L. Benkard, J. Levin, " Estimating Dynamic Models of Imperfect Competition", Econometrica, 2007, 1331-1370

  • M. Pesendorfer and Phillip Schmidt-Dengler (2008) "Asymptotic Least Squares Estimators for Dynamic Games" Review of Economic Studies, Vol. 75, Issue 3, pp. 901-928, July 2008.

  • V. Aguirregabiria and P. Mira, "Sequential Estimation of Dynamic Discrete Games", Econometrica, 2007, 1-53

  • Arcidiacono, Peter, and Robert A. Miller. "Conditional choice probability estimation of dynamic discrete choice models with unobserved heterogeneity." Econometrica 79.6 (2011): 1823-1867.

Problem Set 4: Estimation of Dynamic Game

CLASS 7: DYNAMIC ENTRY GAMES — APPLICATIONS

  • Mitsuru Igami (2014) "Estimating the Innovator';s Dilemma: Structural Analysis of Creative Destruction in the Hard Disk Drive Industry", working paper, Yale.

  • Myrto Kalouptsidi (2014) "Time to Build and Fluctuations in Bulk Shipping", American Economic Review, 104(2): 564-608. (doi=10.1257/aer.104.2.564)

  • (***) Jihye Jeon (2016) "Learning and Investment under Demand Uncertainty in Container Shipping", working paper, NYU Stern.

  • A. Collard-Wexler (2011) "Productivity Dispersion and Plant Selection in the Ready-Mix Concrete Industry", working paper, Duke.

Problem Set: Research Proposal: 4-10 pages.