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Working Papers, No. 2006-28, 2006
Last-In First-Out Oligopoly Dynamics
This paper extends the static analysis of oligopoly structure into an in nite-horizon setting with sunk costs and demand uncertainty. The observation that exit rates decline with rm age motivates the assumption of last-in rst-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, sequences of thresholds describe rms' 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 in nite-horizon game-theoretic foundation for that structure.
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